A Primer in Understanding Budgets (Part One)

As I’ve written previously, understanding how governments and organizations budget resources to achieve their strategic objectives — or, to put it more plainly, learning how to follow the money — is one of the most important skills an analyst can have. In that light, I’m putting together another primer on some of the basic analytical tools you can use to understand and track budgets. (I caveat again here that the framework here is only based on my personal work experience; I’m not a professionally-trained budget analyst, and I’d appreciate any further comments and advice from those with additional experience.)

You can learn many different things from a budget depending on how you choose to approach it. I’m going to attempt to generalize as much as possible but I’m going to use the framing question how much does the U.S. spend in Afghanistan, and how does it spend it? for this exercise because 1) it’s an area I’m most familiar with, in order to be able to give concrete examples from; 2) it allows me to cover a variety of budget documents from a variety of different angles; and 3) I get asked this question by reporters, staffers and other people way too many times as it is. With this post, you too will now be able to answer this question — and more!

The U.S. government also happens to be a (comparatively) transparent organization which makes most of its budget data publicly available in a consistent and timely manner; obviously, it will be a much greater challenge to figure out this information when you’re dealing with more secretive or fragmented organizations.

When approaching a budget, the basic questions to answer are ones of:

  • Budget scope: how much is being spent, and over what time period?
  • Budget priorities: how is the money being divided among its sub-component programs?
  • Budget context: how does what is being spent compare to other budgets?
  • Budget sources: where is the money coming from and where will it come from in the future?
  • Budget actors: who is asking for the money; who is approving the request, and what conditions, if any, are they placing on access to the money?
  • Budget execution: who is going to be doing the spending, and in retrospect, how much of the budget actually got used?

As you can see, I’ve grouped these questions. The first three deal specifically with the money being spent (the “how much” part), while the latter three deal with the actual process of spending it (the “how does it” part — which are the most important questions in terms of a budget as a political process).  I’ll unpack these as briefly as I can in turn, applying them to the case of Afghanistan as I go.

Because of the length of this topic, I’m covering the first three aspects in Part One of this topic (this post), and will address the second three in detail in Part Two (a post coming later this week).

Part One: How Much Does the U.S. Spend in Afghanistan?

Budget Scope: This is the overall, “topline” figure for whatever the budget in question may be. It may, at the end of the day, be all someone is looking for, although it’s not going to tell you the whole story.

Budget figures will usually have a specific time-frame associated with them — which generally speaking will be a fiscal year (or possibly quarter), over the course of which the budget is expected to be spent. It’s important to know when the fiscal year starts since it usually takes time to actually spend the money and saying “we’ve spent $100 million” the day after the new $100 million budget is agreed to wouldn’t be accurate. (Saying we’ve appropriated that much at that point would be. I’ll talk about this terminology distinction a bit more in the Budget Actors section in Part Two when I go through the process of proposing, authorizing, appropriating, and disbursing a budget.) Fiscal years almost never sync up with calendar years, and every country’s are different, and furthermore the government’s fiscal year won’t necessarily sync up with that of private business or other organizations.

In the case of the U.S., the government fiscal year is supposed to start at the beginning of October and end at the end of September in the following year; i.e. Fiscal Year 2012 began October 1, 2011, and ends September 30, 2012. Because the U.S. Congress is a horribly broken institution, we often find ourselves (as we have multiple times this past year) at the start of a fiscal year without a new budget approved and in place, and thus have to rely on big “Continuing Resolutions” which circumvent the normal budget-making process and renew everything at the same levels and under the same authorizations as the previous year (maybe — sometimes, as happened in the compromise deal this year to avert government shutdown, negotiations over the C.R. will make cuts or additions as well) for a set period in order to give Congress time to fight it out some more. Whatever budget we do end up passing will then be in effect for whatever the remainder of the fiscal year is (if there is a big increase in funding, this can sometimes make it difficult to get all the money spent before the fiscal year is up — this has been cited as one of the challenges with the increase in aid to Pakistan that was made by the Kerry-Lugar-Berman act in late 2009).

(Afghanistan, incidentally, appears to be having the opposite problem; their parliament just changed the start of their fiscal year in order to stretch it out and give them more time to finish spending donor money they’ve received that was supposed to be spent this fiscal year.)

Beyond this question of time frame and the topline numbers, the other thing to watch out for when researching will be the currency and units (millions, billions, etc). Depending on what you are studying this will probably be in U.S. dollars; but if not (and you are studying from that perspective), you will need to find a reliable calculation of the exchange rate. XE.com offers a quick-and-dirty version of this for most all international currencies, although it will generally not take into account purchasing power parity effects if you are looking to get a sense of the topline costs in the context of what it would actually buy in the local economy.

Afghanistan Case: There is, believe it or not, no single reliably-updated U.S. government publication that will tell you the total cost of all American spending in Afghanistan on an annual basis. If you want to track down every last budget justification document and tally this up for yourself, more power to you. The Congressional Research Service’s report on The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11 (the most recently publicly leaked version of which was last updated in July 2011) is probably the best single source for the cost of military operations, though, and the chart below, from page 21 of that report, offers a overview of those costs.

CRS War Costs for Afghanistan Iraq and Global War on Terror

Source: U.S. spending by agency in Afghanistan, Iraq, and other 'war on terror' operations from FY01-FY11, Congressional Research Service March 2011

The total cost of Afghanistan operations through the end of this past September, then, should be approximately $444 billion (of which the past two out of ten fiscal years make up nearly half the spending); but this figure will probably be revised in the coming months as FY11 has only just ended and some previously projected or estimated spending numbers may be revised up or down.

For American assistance spending in Afghanistan, which forms the other big portion of our intervention there, the Special Inspector General for Afghan Reconstruction offers a fairly comprehensive quarterly report to Congress, the most recent of which shows (in the chart below on page 45) that cumulative American military and nonmilitary assistance appropriated to Afghanistan between FY2002 and June of FY2011 totaled approximately $73 billion. Again, slightly under half of that was approved just in the past two fiscal years.

U.S. Military and Non-Military Assistance to Afghanistan FY02-FY11

Source: U.S. Military and Non-Military Assistance to Afghanistan FY02-FY11, SIGAR July 2011 Quarterly Report to Congress

Both of these charts only show the funds appropriated in the budget-making process — which does not necessarily represent how much was actually spent. Also note that the CRS report may include a few small operational expenditures during the earliest month of the intervention in FY01 that SIGAR does not. But with these caveats in mind, adding these two parts of the U.S. intervention together, you will get a total figure of approximately $516 billion in U.S. spending over the past ten fiscal years, about $135 billion of which was spent in the most recent fiscal year (compared to about $200 billion during the first eight years of the war).

Protip: The subtler form of exchange rate conversion that people often miss is going to be inflation, particularly if you are looking at a budget over an extended time period. If your data is historical or current dollars, it has not been adjusted to reflect the equivalent value of a dollar today and represents whatever numbers were on the check the day it was signed. If it is constant dollars, it has been adjusted (often based on inflation rates calculated in ten-year increments) to reflect that the equivalent amount would be today after inflation. Comparing 1980 dollars to 2010 dollars as if they were equivalent is like comparing euros to dollars today, and makes for a highly distorted picture. There are a variety of resources that you can turn up with simple Googling that can help you calculate inflation effects if you’re using U.S. dollars and the data hasn’t already been adjusted (and indeed, it looks as though the SIGAR and CRS figures I used above are not inflation-adjusted). For foreign currencies this is going to be more of a challenge and may in the end just need to be caveated.

— — —

Budget Priorities: Budgets are all about priorities; some things get money, and other things don’t. (Money is not the sole measure of organizational priority, but its ability to stand in for other forms of prioritization makes it one of the easiest and most important for tracking and comparison purposes.)  Ascribing those priorities to an organization as a whole requires an understanding of how the process of prioritization takes place, which is going to be discussed in further detail in Part Two. That process of may appear to be nigh-incoherent, given that there are often multiple actors with control over different parts of it and who potentially have conflicting priorities that may make no sense as a whole — but it is a process and in the end priorities are assigned (or re-assigned — most budgets are revised regularly, either on the annual basis or mid-year as needed).

Budget expenses usually take two forms, either capital investments (for example $200 million to build a new Afghan military base, say; or $5 million to train a new police battalion) or recurring expenses (also commonly referred to as operations and maintenance — $20 million to keep the lights on, stock the fridge, and keep the roof from caving in after five years; or annual salaries for the unit). Whether a budget account favors one type of investment or another is one form of prioritization in and of itself, as expansion requires new capital investments but sustaining that expansion requires budgeting for recurring payments thereafter.

Classification of the various sub-components of a budget allows for further comparisons and a deeper understanding of just what kind of activities the budget actually funds. When looking at the budget for U.S. foreign assistance to Afghanistan, for example, some of the money is being directed towards the security sector, some to public health programs, some to agricultural development, etc. Most budget documents will highlight these general categories of spending out for you; within each category are going to be the program accounts which are, in the U.S. system at least, the funding channels established through the legislative authorization process that allow certain agencies of the government to pay for certain activities.

Understanding how those accounts operate and under what conditions requires investigating both the specific legislation that created them and the implementing agency’s interpretation of that legislative guidance, a process that will be described in more detail in the next post. The main thing to note at this stage of review is that you should not necessarily trust the categories provided to you by the budget document under review if you don’t understand how the programs within fit into that category. As an example, U.S. bilateral aid budgets seem to have the tendency to classify program accounts not specifically administered by the Defense Department as “non-military” programs, even when they have strong security components (think counternarcotics and law enforcement programs). Hiding unrelated or loosely-related programs under a broader budget account is a classic technique for funding something that a funder doesn’t want publicly acknowledged or debated.

Afghanistan Case: Looking at the numbers described in the last section, it should be pretty clear that while the U.S. has spent over $500 billion “on Afghanistan”, the portion of that money representing aid spent to rebuild the country has really been dwarfed by the costs of our military and diplomatic operations. (And the amount of aid money that actually reaches Afghanistan after the layers of foreign contractors and costs of security and operations expenses are taken off any given contract is going to be considerably less. This is apparently considered preferable to corruption losses in assistance funds given directly to the Afghan government.) This is not to say it’s not a real expenditure — Afghanistan is certainly nowhere near being able to buy the level of security and military action against the insurgency that the U.S. war machine can provide — but it should give you a sense that when it comes to priorities, “nation-building” has never really been up there on the list.

Within the aid budget alone, which the charts on pages 148-149 of the aforementioned SIGAR report shows in some detail, we can see (with the help of a calculator) that assistance given to the development of the Afghan National Security Forces represents the biggest single program supported by the U.S., at 54% of overall aid spending. SIGAR adds this together with a few other military assistance programs used to train and equip the Afghan security forces to create a “Security” category of assistance totaling approximately $40.97 billion (56% of total aid spending). This categorization is a little imprecise, however, as it doesn’t include programs under the “Governance and Development” category like the Afghanistan Infrastructure Fund (which can be used by the Defense Department to support the construction of Afghan military installations) or the Commander’s Emergency Response Program (which is often used for quick-impact projects which are supposed to support counterinsurgency objectives by employing the local populace).

Protip: Memorize the phrase “Does this include the costs of long-term operations and maintenance for this project, though?” and interject it into discussion whenever possible. Odds are decent that you are the only one thinking about this question. Particularly if you’re talking about budgets in Afghanistan.

— — —

Budget Context: Budgets, again, are about priorities, and determining relative priorities requires context. (“Ten million dollars worth of commitment” doesn’t really tell you anything if you don’t know where it’s coming from and how it compares to other commitments. It’s a couple lifetimes of toiling at the humble research associate salary for the Colin Cookman household; it’s at most a few minutes’ worth of daily expenditure for the U.S. government.) Some forms of comparison can be made relatively easy — for example, is a particular year’s budget rising or falling compared to the year prior, and how does it compare to past budgets a five or ten-year span?

A single budget account can be broken down to its component priorities, as discussed in the section above, but you can also go the other direction to compare it in the context of other, larger budgets. (This is really just about redefining the scope of the budget you are studying.) A road project in Wardak forms a portion of the overall Commander’s Emergency Response Program budget in Afghanistan, which in turn forms a portion of total U.S. security-related spending in Afghanistan, which in turn forms a portion of overall U.S. spending in Afghanistan, which in turn forms a portion of the overall U.S. defense and foreign operations budgets, which in turn forms a portion of the overall U.S. national budget. National budgets in turn can be compared to the total national Gross Domestic Product (the sum value of the American economy). At every level of this nesting set of budgets (and across levels) you can make comparisons in both absolute and percentage terms as to what is getting a greater or less share of resources.

U.S. military spending (in blue) compared to other world powers. Source: SIPRI, via ThinkProgress.

To really get a sense of context it is also important to compare one organization’s
spending to what other organizations are also spending. The classic example of this is the wailing of defense establishment hawks about any prospective cuts to U.S. defense spending (which so far only represent reductions in projected future increases), even when America spends more than the entire rest of the world combined on defense. This also comes up frequently in the case of Afghanistan, where the U.S. is the largest spender on almost every program compared to almost every other organization operating in the country, including the Afghan government itself. Knowing that the U.S. is going to spend approximately $13 billion for the training of the Afghan national security forces this year tells you one thing; knowing that the Afghan government will itself be spending about $1.8 billion during the same period (according to their 2011-2012 budget) tells you quite a bit more.

Afghanistan Case: The previous section already noted that, within the overall Afghanistan budget, security operations and security assistance dominate. There are any number of parts of the U.S. government budget, military or non-military, that you could compare Afghanistan spending to, which I won’t attempt to do so in detail here but which forms a favorite past-time for many members of Congress looking to stave off cuts to a favored project or program. One Congressional Research Service report from June 2010 estimated that the costs of the war (operations only, and not including assistance) were equivalent to about .7% of American GDP in its peak year (at that point 2010, although FY11 has since exceeded it), out of overall defense spending that year equivalent to about 4.9% of GDP. By this measure the cost of Afghanistan on the U.S. economy as a whole has actually been one of the lowest of any war fought by the U.S. in its history, second only to the first Persian Gulf War. Whether you think that’s too much or two little depends on your perspective of the war and the opportunity costs to other budget priorities.

The discrepancy between American expenditures on Afghanistan’s security forces and those of the Afghan government has already been noted; while Afghanistan’s tax revenue collection has been increasing in recent years (thanks to a considerable degree to better customs revenue collection at the border) its national budget still remains eclipsed by activities of foreign donors, and the government is highly aid-dependent. Coordinating amongst the more than seventy international donors who contribute either directly to the Afghan government’s operations or to projects managed by their own aid agencies or non-governmental organizations is a huge challenge, as the Afghan Finance Ministry complained in a November 2009 report. That report notes (in the chart on page 48 of the pdf) that the U.S. was the largest single donor to Afghanistan by far in terms of both pledges and actual disbursal, which still holds true today; although on specific programs (like the education sector, which I believe has been principally financed by the Canadians) other countries sometimes contribute a greater proportion of the funding.

Protip: When researching budgets, as when researching so much else, the challenge is usually to recognize what information isn’t being included that should be used as a point of comparison, as much as what is. Ultimately this is going to require reading widely in the field you are investigating and familiarizing yourself with as many of the resources provide information on it as possible. But the general first step after reading any account is to ask yourself, “what’s missing from this, and where else could I find that information?”

— — —

That’s it for Part One. Part Two, covering the much more exciting (!) political process of how budgets are made and spent, should hopefully be up within the few days.

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One response to “A Primer in Understanding Budgets (Part One)

  1. Pingback: A Primer in Understanding Budgets (Part Two) | colin cookman

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