Reforms are being put in place, though are being partially ignored.
For example, in our Gov't organization, we are on a 'contribution based' system. In theory, low performers get pay decreases and if not remedied, get fired. In theory, high performers get raises.
In practice, it seems that high performers get raises and the only pay decreases handed out are due to inflation: (I know of only one outright pay cut) outright cuts rarely happen and no one is ever fired. This is argueably a misadminstration of how our system is supposed to work. But at least underperformers don't get automatic raises.
As to how money is managed, in our organization you (yearly) estimate how much money you need, and you either get it or part of it and adjust your schedule/goals accordingly. If you end up with extra money, or aren't using the money you have, you give it back and management finds another use for it. Management doesn't seem to keep a FIRM memory of what happened before: if you under-spent last year you can STILL get your FULL budget request if you argue for it effectively and your objective aligns with organizational goals. No one gets budget automatically.
Budgeting's actually pretty enlightened, not the automatic stupidity you describe.