Your accountant would face palm (Expenditure Analysis 101)
By Tyler Smith
How old were you when you got your first bank account? Some of us started with a checkbook, maybe an ATM card to go with it. Do you remember that annoying ledger at the beginning of the book? You were supposed to carefully record each transaction you made, whether it was a deposit, or a check written, or money withdrawn — along with a little note about what prompted the transaction. You felt proud when you remembered to balance your check book, and conversely a little ashamed when you forgot.
Learning to manage personal finances takes some getting used to. Of course, some of us can now log into our bank’s online portal (or app) and see comprehensively, all in one place, our financial flows in real time. Neatly recorded for you is the starting balance at some date, all your transactions with a date and merchant, and the ending balance. (Pause for a minute at this point to thank technology for alleviating our collective guilt for poorly balanced check books!)
Of course, I recognize that a large portion of the world lacks access to basic financial services — a point not to be forgotten, but also not as relevant for this analogy, so stay with me please!
What about the age when you realized you needed personal financial goals? It was no longer enough to know how much money was in your account, but you needed to know how those bucks were being spent. Keeping track of it in your head wasn’t enough, you had to make financial goals — budgets for groceries, rent/mortgage, utilities, fun stuff, savings, etc. — and stick to them. By doing so you ensured you had food, shelter, and a cushion for the unexpected (hopefully). You ensured you and your family remained solvent and you could live your best life with the money you had.
Even those with extremely low wages and no access to formal financial services do this kind of calculus on a daily basis. Despite how much cash you have at your disposal, how you choose to spend it determines — at least partially — your fulfillment in life. As Charles Dickens’ Mr. Micawber said:
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”.
This is the economic concept of utility. We derive utility — or satisfaction — from trading our hard-earned resources for goods or services we can’t produce ourselves. Which goods and services we choose to buy reflects our preferences and what will ultimately maximize our personal utility. At the societal level, these principles are no different.
Hopefully, you are fortunate enough to be governed by a democratically elected authority. You have entrusted (at least tacitly) this government to raise revenue and provide certain goods and services that make more sense to be managed collectively — e.g., military and police protection, clean water, healthcare (sometimes), education (sometimes), etc. You allow your government to make decisions about what should be regulated, to ensure people are protected from undue harm, and you allow them broad authority to decide how to spend money in the collective coffers. Maybe government resources come from you directly (in the form of taxes) or maybe from benevolent sources (external donors). Either way, they partially belong to you and your community as the intended beneficiary.
If you’re with me so far, then you may agree the goal of public expenditure should be to maximize the collective utility of the people. Plain and simple.
If you think that’s reductionist — you’re right. The true picture is super convoluted. Assuming the government has the best interest of the people in mind, how does it know what they really want? How do the people know their interests are being served equitably? What about when the government is negligent or corrupt? When external donors are involved, whose utility should be included in the equation — the recipients, the donors, or both?
These are all very complicated questions with entire volumes already written to explore them. The reason I bring it up here is simple: without the right data we can’t begin to find answers to these questions or even have a productive discussion.
Let’s bring it back to the personal finances analogy. When trying to achieve your financial goals you need some key data. You need to know how much money you have now in all locations (accounts, coin jars, mattresses). You need to know what future obligations you are likely to incur for basic needs (e.g., rent) and how much discretionary funds are left over. You need targets (i.e., budgets) for how much you intend to spend in certain categories going forward (e.g., groceries). What else?
You need to know how you actually spend your resources against those budget categories in the future!! Was it more or less than intended? Did you struggle to meet the budget in a specific area? Do you need to shop for lower prices in some categories? Do you need to rethink your budgets or your goals?
For most of us, this is a no brainer. Let me be clear though: most national governments struggle to know how many resources they have on hand, rarely budget based on intended goals, and do not track actual expenditures against those goals! This is true for domestic programs and overseas assistance (looking at you OECD).
Your accountant would face palm.
Confront any government agency about this and the answer will be the same: “We meticulously track our finances in standard accounting categories.” And…this may be true. But standard accounting categories and project level accounting is archaic and not enough. If you want to achieve big goals, you need better data.
Consider, for example, the sustainable development goals (SDGs). Almost every country is signed on to targets across 17 stated goals. We know achieving the targets requires money, we know the amount of money will be different in different places, yet ask any government official to tell you how much they spent last year (on average) to test a pregnant woman for HIV or deliver a unit of clean drinking water and they will look at you perplexed.
In our above analogy, this would be the same thing as trying to set a budget for food without having been in a grocery store in 10 years to check out prices!
The next defense from officials might be, “We budgeted X, spent all the money, and achieved Y. So, we clearly know the impact of our investment.” No, no, no, no, no.
This concept will be a recurring theme of this Expenditure Analysis blog series, so please repeat it with me at your computer terminal: BUDGET DOES NOT EQUAL EXPENDITURE.
Assume you budgeted $2 per meal last month, thinking you would eat 90 meals (3 per day). You have no money left over from your paycheck at the end of the month. Can you confidently say you (1) ate 90 meals, (2) you spent $180 on food (2 x 90), and (3) that every meal was about $2? No, you can’t. Nor would you want to. All you can say with this level of information is that you spent all your money.
For example, maybe you exceeded your food budget and had to draw from other categories. Maybe in reality, the average meal was $5 because you ate out too often. Maybe the average cost per meal when cooking was $1 and when eating out was $7. Does this information matter? Of course it does, because it will correct your budget assumptions, shed light on the financial implications of different behavior, and determine how you choose to spend your money next month. Maybe you cook at home more, or decide you really like eating out and will increase your budget for food by reducing the number of taxis you take.
The point is, the trade-off is explicit because you have the right data and you are able to continually squeeze out more satisfaction from your income while remaining solvent.
Substitute “solvent” for “sustainable” in the last sentence and it could not be any more relevant to public spending. Budget does not equal expenditure, and we don’t have the right expenditure data at current to maximize the benefits of public and donor services.
What is the right expenditure data and how do you use it? Follow this blog series to find out. Next time we will explore what efforts have happened to better account for money in global health.
Originally published at coopersmith.org.
