Putting It Off for Later: Procrastination and End of Fiscal Year Spending Spikes

DOIhttp://doi.org/10.1111/sjoe.12287
AuthorStuart Baumann
Date01 April 2019
Published date01 April 2019
Scand. J. of Economics 121(2), 706–735, 2019
DOI: 10.1111/sjoe.12287
Putting It Off for Later: Procrastination and
End of Fiscal Year Spending Spikes*
Stuart Baumann
University of Edinburgh, Edinburgh EH8 9JT, Scotland
stuart@stuartbaumann.com
Abstract
Many governments around the world exhibit heightened spending at the end of the fiscal year.
These end of fiscal yearspending spikes often concern policy makers due to their tendency to result
in lower quality spending. This paper uses UK data to offer evidence against the precautionary
savingsexplanation for spending spikes. An alternative explanation is offeredwith procrastination
driving heightened end of fiscal year spending.A new technique of time-variant budgetary taxes
is calibrated to the model, and it is shown to be effectivefor smoothing spending and improving
spending efficiency throughout the fiscal year.
Keywords: Fiscalyear distortions; government spending
JEL classification:H11; H50; H61
I. Introduction
Heightened spending at the end of the fiscal year is a salient
feature of government spending. It has been observed in a variety of
contexts including Canadian military spending (Hurley et al., 2013), US
government procurement (Liebman and Mahoney, 2013), West German
local government job-training programs (Fitzenberger et al., 2014), as well
as in the Australian government (Mannheim, 2012). It can also be seen in
the United Kingdom where 16 percent of governmental capital spending
occurs in the last month of the fiscal year. In the 2011–2012 fiscal year,
this heightened spending represented an extra £9.5 billion of expenditure
relative to the average month of this year.
This concentration of spending in the later months of the fiscal year has
presented a problem for policy makers due to the tendency for rushed
spending to be of lower quality. Some evidence for this comes from
the United States where, as far back as 1980, a senate subcommittee
provided a conservative estimate that 2 percent of contract expenditure is
*I would like to thank Philipp Kircher, LudoVisschers, Mike Elsby, Margaryta Klymak, Sergei
Plekhanov, Jos´e Rodriguez Mora, Daniel Sch¨affer, Carl Singleton, and Andy Snell for useful
comments. I am grateful to the Northern Ireland government for providing their spending data,
and to the UK ESRC for funding my PhD (Grant number ES/J500136/1).
C
The editors of The Scandinavian Journal of Economics 2017.
S. Baumann 707
wasted at the end of the fiscal year due to spending being rushed (US
Senate Subcommittee on Oversight of Government Management, 1980). A
more recent analysis is provided by Liebman and Mahoney (2013) who
analysed data on US government IT procurement and found that projects
commissioned at the end of a fiscal year are 2.2–5.6 times more likely to
receive a quality score of “low quality”.
In light of this inefficiency, this paper uses UK and Northern Ireland
(NI) data to look at two key research questions. What causes gover nment
departments to defer spending until the end of the fiscal year? What policy
responses are effective in counteracting this problem and improving the
efficiency of government spending? To the former question, there are two
putative explanations that are often offered but prove spurious. The first
is that in many countries (but not currently the United Kingdom) if the
departments do not spend their whole budget, then they lose the unspent
portion back to general treasury. The second is that if they do not spend
their whole budget, then their budget for future fiscal years can be reduced.
While both of these explanations can be arguments for spending the entire
budget in a fiscal year, they are not arguments for deferring spending until
the final months of the fiscal year. There must be some other mechanism
that encourages departments to defer spending until the end of the fiscal
year.
As yet, the most developed economic model to offer such a mechanism
is that of Liebman and Mahoney (2013) who explained end of fiscal year
spending through precautionary savings coupled with annually expiring
budgets. Government departments build up a “rainy day” fund to insure
themselves against stochastic shocks. At the end of the fiscal year, they
cannot carry over this fund to the subsequent fiscal year and hence they
spend it all. The clear policy implication is to allow the use of “rollover”
policies where unspent appropriations can be saved to be spent in future
years.
However, this paper shows that there are solid reasons for believing that
this mechanism cannot fully explain the spending spikes seen in practice.
Amongst other indicators, this paper shows that heightened end of fiscal
year spending persisted when the United Kingdom implemented a rollover
policy to allow departments to save funds between fiscal years. There is
no sign that the implementation of this policy had any effect in smoothing
fiscal year spending.
This paper offers an alternative explanation of spending spikes
being caused by procrastination.1Departmental performance is primarily
1The term “procrastination” is often taken to imply time inconsistency in economics (e.g., Prelec,
2004).The modelpresented inthis paperdoes not require time inconsistency. Twocalibrations are
C
The editors of The Scandinavian Journal of Economics 2017.

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