Do Budget Cuts Drive Efficiency?

Will spending cuts lead to greater efficiencies? Or merely a reduction in services?
by | February 15, 2011 AT 9:00 AM

There is an old adage in the business world: that the best way to find cost efficiencies is to cut budgets. Only when faced with a reduction in resources will an organization make the difficult changes to reduce costs.

Currently, states around the nation are forming their budgets while facing multibillion-dollar budget gaps. A number of governors, including Democratic governors, have committed to closing this budget gap without raising taxes. Inevitably, this means that there will be spending cuts. The question is: Will these spending cuts lead to greater efficiencies? Or merely a reduction in services?

In a front-page article “Governors Chop Spending,” The Wall Street Journal reports that a number of new governors -- including several Democrats -- are proposing big changes in an effort to reshape state government without raising taxes.

“The way we responded to recessions in the past was to do less of the same, with the hope of having more money later so we could do more of the same,” Oregon Gov. John Kitzhaber, a Democrat, told WSJ. “There's a once-in-a-generation opportunity to do some things we should have done a long time ago but couldn't make the politics work.”

That sentiment is echoed on the Governor’s budget website: “Oregon's budget shortfall represents an opportunity to change and improve the way the state does business. We cannot rely on the ways we have done things in the past -- even though they are familiar to us.” For example, Kitzhaber is proposing placing all of the state’s education spending -- early childhood, K-12, and higher education -- under a single board chaired by the governor.

In New York, incoming governor Andrew Cuomo has proposed a budget that reduces state spending by 2.7 percent -- which landed him on the cover of the New York Post depicted as an ax-wielding lunatic. Calling the state “functionally bankrupt” and facing an estimated $10 billion deficit, Cuomo’s $133 billion budget also eschews tax hikes in favor of reforms, including merging 11 existing agencies or authorities into four.

Cuomo’s budget also included reductions of 10 percent for community colleges. Anne Kress, the president of Monroe Community College, notes that while she will be advocating to have the funding restored, the cuts have been prompting an operational reassessment. “[W]e have been seeking efficiencies and eliminating costs where possible -- all while safeguarding our fundamental mission...”

California’s new-again Governor Jerry Brown, also a Democrat, facing a $25 billion gap, sounded like something of a fiscal hawk in his State of the State address: “We have to restructure our criminal justice system, carefully realign state and local government functions, and streamline state government. All of this can happen if we find the courage and summon the will to tackle our budget deficit head on… The times call out for vision and for discipline. Discipline so that we live within the revenue which the state collects each year...”

Unlike some others, Brown is seeking a popular vote to extend temporary tax hikes, but is nonetheless facing a budget with hard choices that must be dealt with. “Kicking the can down the road, by not owning an honest budget, is simply out of the question,” Brown told his audience.

Will the proposed cuts drive efficiency? Probably. Within every portfolio of spending, there are more and less effective programs. When governors look to cut, those programs that aren’t delivering public value are likely to come under greater scrutiny.

Such changes won’t go over well with those affected, but in the absence of federal bailout money it looks like states will have little choice. Few governors of either party are prepared to embrace significant tax hikes their budget gaps, meaning most states are looking to streamlining and service cuts. The more that can be achieved through streamlining, the less service cuts will be needed.