Spending freeze procedures

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Spending freeze procedures entail the steps taken by local, state or federal governments aimed at reducing/managing budget deficits and balancing the budget. Spending freezes are generally considered in times of subpar economic growth whereby revenues are below expectations and tax increases may exacerbate the situation. Spending freezes in the public sector involve a myriad of political considerations which may result in sub-optimal design and implementation of the freeze as the political actors jostle to maintain or gain their political standing.

CONCEPT


Goals
Example

A city government is facing unprecedented debt obligations and the current years budget is also dependent upon borrowing to fund the budget deficit. The city's credit rating has also been downgraded by the rating agencies. Meanwhile, the city's debt burden and and perennial budget deficits have resulted in property tax increases in three of the last five fiscal years. The city is also experiencing a persistent population decline and reduced private sector investment. The City council, led by the mayor, votes to implement a spending freeze for the remainder of the current fiscal year. The City implements the spending freeze by halting the award of all non-essential contracts. The city also moves to manage city funds and resources to avoid the need for supplemental funds in excess of city funds already made available through the current budget.

Tradeoffs

Tradeoffs of implementing this policy may include:

  1. Failure to keep up with increases in inflation results in the spending freeze morphing into a spending cut over time.
  2. Sustaining spending freezes over a multiyear period may require a significant downsizing of the organization/government.
  3. Alienation of constituents who will be affected by the termination of contracts deemed non-essential.
  4. The freeze may not be sufficient to balance the budget due to growing interest payments and pension obligations.
  5. The City may miss viable investment opportunities during the freeze that may be of long term benefit to the city.


Compatibility Assessment

If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Will the spending freeze result in the identification of sustainable/long-term cost savings?
  2. Will the spending freeze result in a balanced budget within the desired period of time?
  3. Will the spending freeze compel debt rating agencies to re-evaluate the City's credit rating for a possible upgrade?
  4. Can the spending freeze be implemented to protect essential sectors of the economy as well as vulnerable constituents?
  5. Will the spending freeze result in favorable tax policies and/or prevent additional tax increases?
Design

The following questions should be considered when determining how to implement this policy:

  1. Can the spending freeze be initiated through executive action?
  2. Must the proposal be tabled before the legislature?
  3. Will the spending freeze result in the breach of any existing contract?
  4. Will the enforcement of the spending freeze be objective and free from manipulation and political tampering?
  5. What sectors or department present the best opportunities for cost savings?

ADOPTION


PolicyGraphics
  • Has adoption of: Limited. Implementation of spending freezes is generally limited due to political implications in the form of direct impacts on the approval ratings of the politicians involved. Political considerations may only be superseded by the merits of spending freezes in times of economic crises.[1]
Adopters

STAKEHOLDERS


Supporters
  • Bondholders. Spending freezes may be a sign of increased fiscal discipline and may result in an increase in the value of the City's bonds. [4]
  • Homeowners. The Spending freeze may provide relief from property tax hikes as the government looks to cost cutting rather than increasing taxes.
Opponents
  • Government contractors. Spending freezes may result in cancellation of existing projects and scaling back of proposed projects. [5]
  • Government employees/Unions. Spending freezes may result in the shelving of future pay increases, hiring freezes, and ultimately, job cuts.

REFERENCES


Research
Resources
Footnotes
  1. http://www.nytimes.com/1989/02/16/us/freezes-squeezes-bush-s-call-for-flexible-budget-procedure-step-that-more.html
  2. http://www.wsj.com/articles/brazil-government-announces-spending-freeze-1448909665
  3. http://www.illinoisobserver.net/2015/01/15/extra-rauner-issues-spending-freeze-road-map-state-agencies/
  4. INSERT a reference.
  5. INSERT a reference.
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