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Towards a Regulatory Budget:
A Working Paper on the Cost of Federal Regulation (1979)

  Jim Tozzi, ed. 1979.


When the question of what is to be counted is resolved, there remains the problem of how that information is to be structured. The structure should present the information in a manner that is useful for policy evaluation and decisions. Also, although one purpose of the regulatory budget is to present disparate Federal regulatory activity as a system, the budget must be implemented within the regulatory system that is, in fact, not unified. Regulatory agencies and programs may complement, conflict, be parallel, or be independent relative to each other. The same can be said about the budget entries as well as any attempt to manage or control those entries.

Alternative Regulatory Budget Structures

The structure of a regulatory budget can have numerous dimensions. Entries can be organized along agency, sectoral, functional, or regional lines. Entries in the existing expenditure budget are organized by agency. However, the Special Analyses Volume of the Budget does present budget authority and outlays by programmatic or functional categories. Analyses in recent years have covered education, health, income security, civil rights, environment and other topics. Because the various appropriations and funds in the expenditure budget are spent by Federal governmental units, there is no analogy between the expenditure budget and a sectoral breakdown in a regulatory budget. Of course, the very nature of a regulatory budget is to bring together regulatory expenditures incurred by sectors other than the Federal government (industry, agriculture, commerce, state and local government, etc.) Finally, a regional dimension (states, Standard Metropolitan Statistical Areas, congressional districts) could also be of policy interest. Other dimensions are also possible. An ideal regulatory budget system would allow the retrieval of entries by each dimension of interest.

It is not feasible for a regulatory budget to address all of these dimensions at the outset. Even after considerable development, it is likely to remain incomplete. In addition to the managerial problem of implementing the concept, there are technical problems to deal with when the budget becomes multidimensional. Not only must entries be defined in a manner consistent with all dimensions; but, more seriously entries are likely to be interdependent and not additive across all dimensions. Initially the regulatory budget must be explored and developed along a workable dimension.

The dimension that appears most feasible, and expandable if appropriate, is an agency one. The agency dimension has the following advantages:

  • Public expenditure entries in the regulatory budget will be drawn from the agency entries in the Federal budget. Developing private regulatory expenditures along agency lines is the most direct extension on the information already available.
  • The agency is the regulatory decisionmaker. Regulations are written, implemented, and enforced within the agency setting. The regulatory budget would affect these activities.
  • The agency must allocate its expenditure budget appropriations. The allocation of the regulatory budget would be a complementary effort.
  • The agency will be the principal source of information on the compliance effects of its regulations. Development of regulatory budget information should be an integral part of the regulatory process.
  • The agency is the focus of improved regulatory management. It is the individual agencies that are to be melded into a regulatory system. Under a system of improved management and oversight, it is the agencies that are to be managed and overseen.
  • The agency must justify its regulatory budget just as it justifies its Federal budget appropriations. Although the regulatory budget may never become legislatively formalized, the agency will still have the responsibility of linking the merits of its programs with its regulatory budget totals.
  • Even if an alternative basis were more desirable, the developers of a regulatory budget would still have to work through the agency programs to calculate an alternative basis.

There are strong arguments for developing the regulatory budget along dimensions other than or in addition to the agency, one. A strict agency approach limits the capability of dealing with some crosscutting problems. For instance, in a given situation one regulatory management objective may be to limit or postpone compliance expenditures in a specific industry because of conflicts with nonregulatory objectives. A sectoral regulatory budget would be useful in that case. In another case, the objective may be to advance the Federal environmental program. This may require increased allotments for some agencies yet decreases for others. It would be useful in this case to have a functional or programmatic regulatory budget analogous to the Special Analyses that cuts across agencies to cover government-wide program areas.

The choice of the agency dimension as the practical way to develop a regulatory budget does not diminish the value of alternative dimensions. The Federal effort to achieve specific regulatory objectives does not in all cases reflect the existing government organization. Environmental quality, public safety, economic competition, and consumer protection are pursued by a number of regulatory agencies. Ideally, the regulatory budget should group costs by national objective. The budget should reflect the policy choice set involving inter- and intra-program tradeoffs. Theoretically, all Federal procurement, and similar elements are in competition for funds. Practically, some programs are insulated from the others.


Towards a Regulatory Budget:
A Working Paper on the Cost of Federal Regulation (1979)

Jim Tozzi, ed. 1979.


The regulatory budget and the fiscal budget address a common problem: keeping expenditures in line with available national resources. This commonality in objectives leads to a commonality in the problems encountered in implementation. Consequently, many problems which arose in the development and execution of the Federal budget system are similar to those confronted in the development and implementation of a regulatory budget. Of equal significance is the observation that many of the solutions to the problems encountered in the implementation of the Federal budget system may be applicable to the problems encountered in the implementation of a regulatory budget.

The law establishing the Department of Treasury (1789) made it the duty of the Secretary of the Treasury to prepare and report estimates of the public revenue and public expenditures. A supplementary act passed on 1800 directed the Secretary to digest, prepare and lay before Congress--a report containing estimates of public revenue and expenditure.

Alexander Hamilton attempted to utilize these statutory authorities to formulate spending plans for carrying out the functions of the government as a whole. Secretary Hamilton failed. He failed for a number of reasons, two of the more significant being an institutional conflict with Congress and an Executive Branch which was created in a manner which did not lend itself to the discipline imposed by a Federal budget.

For these reasons, the role of the Secretary of the Treasury in budget formulation was limited to a mechanical compiler of the individual budget requests of the Executive Branch Departments. The Secretary most certainly could not modify an estimate provided by a Department. Over the years, this minor role accorded to the Secretary, and thus the Executive Branch in total, became so accepted that eventually Congress passed a law, which gave statutory recognition to the then existing practice of limiting the Secretary's role to that of a compiler. The end result of this process was that the Executive Branch:

  • had no mechanism for allocating scarce financial resources among competing ends
  • had no forum for establishing national priorities
  • performed no review of duplicative programs undertaken by Federal agencies.

Furthermore, the Congress had no forum for addressing the same overall fiscal concerns since there was no single appropriation committee. This chaotic approach to the expenditure of public funds continued until there was an increasingly greater concern expressed by the Executive Branch, the Congress and the public need for the greater efficiency in government. This concern was the result of a growing Federal Government and increasing taxes--some of the concerns expressed in support of a regulatory budget.

The movement towards the development of a Federal budget was labeled, in the then popular words of the day, as "Budgetary Reform" which in part parallels to current emphasis on regulatory reform.

In 1911, the President's Commission on Economy and Efficiency was established to study ways of improving the management of the Executive Branch. The Commission concluded that no worthwhile improvement in the management of the Executive Branch could take place until the Federal Government adopted a Federal budget system. The Commission published two reports. The first, "The Need for a National Budget" which documented the deficiencies in the current system, recommend ways for overcoming these deficiencies and outlined a structure for the Federal budget.

The second report of the Commission, "Message of the President of the United States Submitting for the Consideration of the Congress a Budget with Supporting Memoranda and Reports" set forth a budget for 1914. The Congress opposed the report on the basis that the adoption of its recommendations would result in an intrusion of the Executive on Congressional prerogatives.

Notwithstanding this growing concern, no legislative action was taken to implement a Federal budgeting system until the World War I. At its conclusion, the fiscal condition of the nation had changed considerably and within a short period of time. No longer were the financial needs of the nation so small that they could be financed with ease by individual taxpayers. Instead, the nation was confronted with a large national debt, the maintenance and retirement of which would not go unnoticed by the taxpayers. For the first time in history, the Federal Government had to relate expenditures to revenues. The public was arguing for reduced Federal expenditures and this objective could be met by a Federal budget process. In response to this concern, the House established in 1919 a "Select Committee on the Budget" to study the subject of a national budget. The Committee held intensive hearings on the subject, keeping in mind the need to develop a system compatible with the American constitutional form of government.

The report of the House Committee was the catalyst which led to the passage of the Budget and Accounting Act of 1921. This Act directed the President--and only the President--to prepare and submit to the Congress annually, complete information on revenues, past and future expenditures and the manner in which the expenditures should be financed. The Act also created the Bureau of the Budget.

The successful implementation of a Federal budget system required a sound analytical base. The analytical base took the form of a consistent set of accounting rules and practices. It should be noted that the Budget and Accounting Act was passed notwithstanding the nonexistence of accepted accounting procedures. Only eight months after the Budget and Accounting Act was passed, the first Director of 0MB stated in a speech before a meeting of the Business Organization of the Government: "And let me stop right here . . . to criticize the disgraceful and archaic system which characterizes government accounting."

An analogous concern in the development of a regulatory budget is the existence of procedures to estimate compliance costs--the expenditures need to comply with Federal regulations.

Analytical Commonalities

Many of the analytical issues one confronts in the preparation of a regulatory budget have in many instances been faced in the development of the Federal budgeting system. This is not to suggest, however, that the intensity of a particular issue is constant when one moves from a fiscal budget to a regulatory budget.

The remainder of this section will address some of the analytical problems identified by students of regulatory budgeting and will relate proposed solutions to current practices in the development and execution of the fiscal budget.

Compliance Costs

If there is one subject area that has been highlighted it is that of estimating compliance costs. The estimation of compliance costs is a key element of any regulatory budget. For the purpose of this discussion the term compliance costs simply means expenditures incurred by the private sector as a result of federally imposed regulations.

There are inherent difficulties in estimating compliance costs. These difficulties include (1) the lag between the time a regulation is issued and the time private sector begins to spend funds, (2) the fact that some of the major expenditures resulting from a regulation occur many years after it has been promulgated and (3) the difficulty in identifying costs associated with a particular regulation.

These issues are common to the preparation of the fiscal budget. Consider, for example, a specific Federal program, the wastewater treatment program sponsored by the Environmental Protection Agency. The President's FY 1980 budget request included $3.8 billion in budget authority for this program. When the appropriations are received, EPA is allowed to enter into contracts whose total cost is $3.8 billion. By simply signing the contracts, EPA has not increased Federal expenditures by one dollar since expenditures do not occur until the grantee sends a request for payment and EPA honors such a request. The construction of a wastewater treatment plant takes place over many years.

To accurately estimate outlays in the construction grants program, one has to first assume a date when the grantee is going to request a grant from EPA, whether the grantee's application will meet Federal requirements, when the grant will be approved, when the grantee will initiate construction and the rate at which construction will proceed. These uncertainties are compounded by external events such as court suits, bad weather conditions, strikes, and bidding problems with potential contractors.

While the expenditure estimates for a particular project can vary significantly from the actual expenditures, recent program expenditures have been within 5% of the estimated levels.

The analogy to the fiscal budget process is as follows. The construction of a wastewater treatment plant is the result of a Federal regulatory action directed at a municipality. The fact that a wastewater treatment plant is constructed by a private firm in response to a Federal regulation should not present analytical problems any more or less severe than the analytical problems associated with the construction of a wastewater treatment plant by a municipality pursuant to a Federal regulation.

With respect to problems of joint costs, there are certain joint cost problems for which there is no economic solution -- whether they are confronted in a fiscal budget or a regulatory budget. One way of addressing this concern is to determine whether the magnitude of the joint cost problem is any greater in the regulatory budget than in the fiscal budget.

Joint cost issues do arise in the formulation of the fiscal budget. Consider, for example, the aforementioned wastewater treatment plant. Wastewater treatment plants serve many ends. Although they reduce the amount of pollutants which enter a stream, in many instances they also decrease the cost of providing portable drinking water. This occurs because water purification plants which take water from a stream have less pollutants to remove. Thus joint cost allocation problems occur in the course of making Federal budgetary allocations between the Federal water quality program and the Federal safe drinking water program.

With only a minimal effort, a wide range of joint cost issues which arise in the course of the formulation of the fiscal budget could be cataloged since, in general, there is no economic solution to the joint cost problem. The Federal government has developed a considerable body of accounting techniques to address this problem. These techniques have developed over the past fifty years and continue to be modified to address emerging problems.

Consequently, it is not at all clear, whether the joint cost problems inherent in the formulation of a regulatory budget are any more or less severe than those encountered in the formulation of the fiscal budget.

Benefit Estimation

Another analytical issue raised with respect to the development of a regulatory budget is a potential emphasis on the cost of regulations with the result that the benefits they provide to society will be overlooked. This is a just concern but it is also present in the fiscal budget.

Since 1921, and to the current day, the fiscal budget is merely a presentation of estimated revenues and planned expenditures. There is no--or little--quantitative expression of the benefits it provides. This is not to suggest that benefits are not considered in the development of the fiscal budget. In fact, the expected benefits to be derived from the programs presented in the fiscal budget is a key element in determining which programs are to be funded and which programs are to be excluded.

Consequently, it is not obvious why the lack of quantitative benefit data should inhibit the implementation of a regulatory budget any more than its non-existence has inhibited the preparation of the Fiscal budget.


In one respect the fiscal budget has a high degree of enforceability since, by law, the Federal Government cannot spend more than is appropriated by the Congress. From this point, the enforceability of the Federal Budget is absolute. However, in practice this degree of enforceability diminishes in part. It diminishes because of programs such as entitlement programs. Entitlement programs arise from a number of statutes which guarantee certain individuals some form of financial relief if they fulfill the criteria set forth in the statute. One example is the social security program. Any individual of a specified age and a given income level is entitled to a payment from the Federal Treasury. Furthermore, in other program areas, the constitution authorizes any citizen who, in their opinion, has suffered a financial loss as a result of the Federal Government to make a claim to the U. S. Court of Claims. If the Court of Claims grants relief, the individual is compensated whether or not funds have been requested in the budget.

In addition, it should be noted that the Congress appropriates budget authority--authority provided by law to enter into obligations which result in immediate or future outlays of government funds--but it does not "appropriate" a level of expenditures. Only in rare instances do we work under statutory limits on expenditures.

There are two other aspects of enforcement--one related to the concern that we will never know if we exceed a regulatory budget and the other that if we do--nothing can be done about it.

Reporting procedures can be developed which would set forth the expenditures associated with the regulatory budget. Over the past seven years, considerable experience has been gained from the process used to estimate the amount of private sector expenditures which occur as a result of Federal environmental regulations. Although they can be improved upon, they do exist.

It is true that once private sector expenditures exceed the regulatory budget, there is little that can be done about it in the fiscal year this occurred. This is also true in the case of the Federal budget. When the books are closed at the end of a fiscal year, little can be done about the fact that actual expenditures exceed planned expenditures. As explained above, this phenomenon results as a result of appropriating budget authority without a ceiling on outlays, as well as the existence of entitlement programs and claims by private parties.

The absence of a corrective mechanism In the year the actual expenditures exceed estimated expenditures is not to suggest the absence of a corrective mechanism in future years. In fact, corrective mechanisms are developed--in the fiscal budget--as a result of the information gained during the budget year. There are a large array of such corrective mechanisms--these range from requesting less funds in future years to developing better models for the expenditure of funds.

Lastly, another issue raised with respect to the enforceability of a regulatory budget is the fact that in any one fiscal year, the majority of the expenditures will be related to expenditures associated with existing regulations--not regulations yet to be promulgated.

This is correct--but it too is common to the fiscal budget. In any one year, no more than 25% of the planned expenditures are associated with discretionary programs. It is unlikely that there is any more or less flexibility to reduce ongoing programs funded in the fiscal budget, in any given fiscal year, then there is in the programs covered in the regulatory budget.

In summary, there is no clear case for stating that the enforceability of the regulatory budget is any more or less difficult than the fiscal budget. Furthermore, and of more significance, there is no clear reason why the degree of enforceability in the regulatory budget should be comparable to that which exists in the Federal budget. Such a determination must rest with the ultimate use of the regulatory budget.

A Movement Towards a Regulatory Budget -- The Non-Compliance Penalty Program

Section 120 of the Clean Air Act establishes a non-compliance penalty program. This program levies penalty on any firm that violates emission requirements established pursuant to the Clean Air Act. The penalty is calculated as the incremental expenditures--beyond those currently being expended-needed to bring the source into compliance. Furthermore, even if the source takes legal action to dispute the penalty and loses, it is still charged the penalty while the courts review their petition.

Obviously, the ability of the Federal Government to perform an accurate calculation, of the compliance Costs resulting from the imposition of a Federal regulation on a private sector source is a key element of this program. Expenditures for compliance with Federal Air Regulations comprise some 40% of the national (Federal, State and local) expenditures for pollution abatement. The Federal Government has therefore, initiated a statutory requirement to estimate compliance costs for a major sector of the economy notwithstanding the implementation of a regulatory budget.

Many of the aforementioned analytical problems associated with the implementation of a regulatory budget are present in the non-compliance penalty program. These include procedures to estimate compliance costs, the joint cost problem, and enforceability.

Since the penalty is set at the incremental cost of compliance, there is considerable incentive to develop accurate estimates of compliance costs. The higher the estimates of compliance costs--the higher the penalty. This has the additional advantage of providing a downward bias in compliance costs to counter act any upward biases associated with the development of compliance costs.

The discharge of the non-compliance penalty program also requires one to address the joint cost problem. Consider for example, a steel mill which converts from an oxygen furnace to an electric arc furnace. Basically a furnace is a factor of production, not a facility for complying with Clean Air Regulations. Nonetheless, to some degree, the cleaner electric arc furnace is an alternative to placing a precipator on an oxygen furnace. The joint cost issue arises when one attempts to identify what portion of the costs associated with the installation of the electric arc furnace can be attributed to pollution abatement.

The noncompliance penalty program also forces one to address the enforceability problem, since the penalties are levied until which time the source comes into compliance--as opposed to when it makes a commitment to install pollution abatement equipment--the actual compliance costs, and thus the penalties, could differ substantially from the estimated compliance costs.

In any fiscal year, if a source is either overcharged or undercharged there is nothing that can be done in that particular fiscal year--as is the case if actual compliance costs in a regulatory budget exceed estimated compliance costs. The corrective mechanism--and thus the enforceability in the non-compliance penalty program arises from the statutory authority to either make a refund to the source, in the case of an overestimate of the compliance penalty, or to have the source make an additional payment to the Federal Government in the ensuing fiscal year.

In either case, deviations from the estimated level of compliance costs in one fiscal year are corrected in a subsequent fiscal year. The same corrective mechanism could be instituted in a regulatory budget.

In summary, notwithstanding a number of analytical problems common to the implementation of a regulatory budget, the Administration proposed, and the Congress enacted the non-compliance penalty program.

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