Transcript Chapter 10: Budgeting - Oglala Lakota College

Chapter 11: Budgeting
Defining Budgeting
• Budget decisions shape government
programs.
• Three big questions:
– What should government do?
– Who in government should decide?
– How should the decisions be made?
• Process
• Analysis
• Normative values
Economic Role of the Budget
• Federal budget and national economy
have a reciprocal role
• Fiscal policy: government taxation and
spending
– Since the 1930s, economists and government
recognize that fiscal policy affects the
economy
Economic Role of the Budget
(continued)
• Compensatory economics: preached by
Franklin D. Roosevelt’s New Deal; the
government can and therefore should use
the budget to steer the economy; British
economist John Maynard Keynes
(intellectual father of the movement)
Economic Terms
• Fiscal year: any given budget year
• Surplus: more revenues than
expenditures in any given budget year;
slows economic growth by draining money
from the economy
• Deficit: expenditures exceeding revenues
within a fiscal year; pumps money into the
economy and promotes economic growth
Economic Terms (continued)
• Debt: deficit accumulated over time
constitutes national debt
• Monetary policy: the Federal Reserve’s
management of the money supply
• Stagflation: stagnant growth and inflation
Economy Shapes the Budget
• National economy shapes the federal
budget.
• Budget making depends critically on
estimating the likely levels of economic
growth, unemployment, inflation, and
interest rates.
• Preparing the budget depends first on
forecasting economic performance.
Political Role of the Budget
• Budget embodies fundamental political choices:
– Values: which programs get funded and which do not
– Institutions: relative sway of the executive and
legislative branches
• Congress responsible for the budget until the
end of World War I
• Budget and Accounting Act of 1921:
revolutionized federal budgeting; for the first
time the president was to submit an annual
budget to Congress
Top-Down Budget Making
• Preparation of the budget is the first step
in the budgetary process.
• Top-down budget approach: each
government’s executive sets broad targets
for overall spending and revenues.
• Spending targets fix a ceiling under which
the agencies are expected to stay in
preparing their individual budget requests.
Bottom-Up Budget Making
• Central theory of bottom-up budget
making is incrementalism.
• Incrementalism (Aaron Wildavsky):
officials do, and should, ask for a fairshare increment over the agency’s base;
these increments reflect the agency’s
share of changes in the budgetary pie.
Bottom-Up Budget Making
(continued)
• Incrementalism assumes:
– No one really considers the whole budget
– Political battles focus on the size of the
agency’s increment
– Political battles focus on the increment’s size
compared with those received by other
agencies
Attempts to Reform Incrementalism
• Management by objectives (MBO): Nixon
administration; Office of Management and
Budget implemented this strategy to strengthen
the ability of managers to manage; emphasized
efficiency.
• Zero-base budgeting (ZBB): Carter
administration; budgeters began from a certain
level of spending, assembled decision
packages, and ranked them.
Attempts to Reform
Incrementalism (continued)
• George H. W. Bush administration implemented
a flexible freeze, in which increases in some
programs would be balanced by decreases in
others.
• Performance Assessment Rating Tool
(PART): George W. Bush administration; sought
to integrate measures of agency performance
with budgetary decisions.
Uncontrollable Expenditures
• Uncontrollable expenditures: portion of
the budget that has become uncontrollable
• Share of the federal budget that can be
changed in any given year fell from 66
percent in 1965 to 35 percent in 2009
Budget Appropriations
• Budget submitted by the president is a set
of recommendations.
• Congress authorizes expenditures and
determines how revenues shall be
obtained.
Budget Appropriations
• Rule of anticipated reactions: president
and agencies adapt their estimates and
recommendations to fit their perceptions of
how Congress will react to them.
• Washington Monument ploy: agencies
offer to cut their most popular programs in
the full knowledge that legislators would
never allow such cuts to take effect.
– e.g., The National Park Service would never
close the Washington Monument.
Budget Appropriations
• Congress responsible for this
appropriations process:
– Authorizations: create programs and put
limits on how much money they can spend
– Appropriations: commit money for spending
Congressional Budget Act
Congressional Budget Act of 1974:
• Gave Congress more time to work on the
budget by pushing the start of the fiscal
year forward from July 1 to October 1
• Created new committees in each house
and created a new process
Budget Process
• Congress sets budget totals.
– Legislative budget: for the first time, Congress
would prepare an estimate of total expenditures,
revenues, and the deficit.
• Congress authorizes the programs and
appropriates the money.
– Budget authority: appropriations committees in each
house decide how much money should be spent.
• Outlays: money expected to be actually spent.
More Budget Terms
• Black budget: Defense Department’s
secret projects; only a handful of members
of projects know about their size and scale
• Earmarks: pork-barrel spending projects
• Continuing resolutions: combines all the
government’s spending decisions into one
huge package; when Congress cannot
complete work on time
Budget Process Reforms
• Many potential reforms have been
suggested:
– Create a biennial budget.
– Create a capital budget: for capital
investments, such as highways and bridges,
whose benefits stem far into the future.
– Give the president a line-item veto: new veto
power over individual line items in the budget.
– Enact a balanced-budget constitutional
amendment.
Budget Execution
• Executive is overseer of the execution
phase.
• Congress tries to restrain executive
discretion through legislative controls.
• Congress limited executive impoundment
through Impoundment Control Act of 1971.
– Impound: refusal by the president to spend
money appropriated by Congress; practiced
excessively by Nixon.
Budget Execution (continued)
• Impoundment Control Act distinguishes
between:
– Rescissions: permanent suspension of
outlays
– Deferrals: temporary suspension of outlays
Management Control
• Follow the flow of money.
• Money trail demonstrates who is doing
what.
• By controlling the flow of money, the
executive can control the direction and
pace of government activity.
• The flow of money is important for
reporting and evaluating an agency’s
performance.
Budgeting for State & Local Gov
• Vast array of strategies but several
common features:
– State and local governments must balance
their budgets (cannot print money or engage
in long-term borrowing like the federal
government can)
– Have two distinct budgets: an operating
budget and a capital budget
– Operations shut down if a new budget is not
passed by the start of the new fiscal year
Conclusion
• Budgeting is the arena that most
fundamentally shapes policy decisions
• Decisions that are formalized at one stage
of the process might be reformulated at
later stages due to budgetary concerns