• Chart of the Week
  • November 13, 2017

Use it or lose it

An increase in last-minute federal spending comes with a decline in project quality.

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For most people, the end of the year is approaching. For government agencies, the year ended weeks ago. As the 2017 fiscal year came to a close, departments with expiring budgets rushed to use up their yearly allotment of government funds. After all, failing to spend all of their resources would seem wasteful.

However, in a new paper in the November issue of the American Economic Review, authors Jeffrey Liebman and Neale Mahoney find that this end-of-the-year spending surge can result in waste as well.

A disproportionate 16.5 percent of all spending occurs in the last month of the year, and 8.7 percent occurs in the last week. This spike in spending comes with a steep decline in quality. During the evaluation process, the odds of receiving a lower quality score increase by at least 2.3 times for projects created during the last week.

Moreover, only 3.04 percent of projects originated during the year receive a one or two (the lowest possible scores), but 25.79 percent of projects originated in the last week are in that category, as shown in the figure below.

 

Figure 4, Panel A from Liebman and Mahoney (2017)

 

Allowing for budget rollovers or switching to multi-year funding cycles can improve this situation. The Department of Justice has special authority to roll over some of its revenue, and it uniquely maintains project quality at the end of the fiscal year.

As of 2009, the procurement of goods and services accounts for $538 billion of federal spending. On that scale, adjusting the rollover rules in even small ways could have a large impact on wasteful spending.