17 chapter public sector economics: the role of government in the american economy randall holcombe...
TRANSCRIPT
17CHAPTER
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
The Government Budgeting Process
17-2
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Government Budgeting Government Budgeting ProcessProcess
Role of budgeting process Role of budgeting process Allocate resources to most highly valued Allocate resources to most highly valued
usesuses
17-3
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
The Federal Budgeting The Federal Budgeting ProcessProcess
Budgetary Reform in the 20th CenturyBudgetary Reform in the 20th Century Budget and Accounting Act of 1921Budget and Accounting Act of 1921
Directly involved presidentDirectly involved president Established Bureau of the BudgetEstablished Bureau of the Budget Created General Accounting OfficeCreated General Accounting Office
In 1970 - Bureau of the Budget In 1970 - Bureau of the Budget reorganized and named Office of reorganized and named Office of Management and Budget (OMB)Management and Budget (OMB)
17-4
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
The President’s BudgetThe President’s Budget
OMB responsible for developing OMB responsible for developing president’s budgetpresident’s budget
OMB solicits requests from federal OMB solicits requests from federal agencies for fundingagencies for funding Sum of agencies requests will be Sum of agencies requests will be
unacceptably largeunacceptably large Requests can be viewed as menu of Requests can be viewed as menu of
choices for those determining budgetchoices for those determining budget Political and economic documentPolitical and economic document
17-5
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
The Congressional The Congressional BudgetBudget
Congressional Budget Office (CBO) Congressional Budget Office (CBO) assists Congress in evaluating president’s budgetassists Congress in evaluating president’s budget submits report to congressional budget submits report to congressional budget
committees committees Budget resolutions presented to both houses Budget resolutions presented to both houses
of Congressof Congress House Ways and Means Committee and House Ways and Means Committee and
Senate Finance Committee hold hearings on Senate Finance Committee hold hearings on specific appropriationsspecific appropriations
Further budget resolutionsFurther budget resolutions
17-6
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
The Congressional The Congressional BudgetBudget
Congress does not always follow Congress does not always follow scheduleschedule
Budget resolution late or not passed Budget resolution late or not passed in some yearsin some years Results in continuing resolution rather Results in continuing resolution rather
than final budgetthan final budget
17-7
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
IncrementalismIncrementalism
Theory of budget determinationTheory of budget determination Suggests budgets of government Suggests budgets of government
agencies will be incrementally larger agencies will be incrementally larger than the previous yearthan the previous year
17-8
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Effects of Special Effects of Special InterestsInterests
Special interests important element Special interests important element in budgetary processin budgetary process
Political pressure works toward Political pressure works toward expansion of existing programsexpansion of existing programs
17-9
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Incrementalism and Incrementalism and EfficiencyEfficiency
Incrementalism logical within special Incrementalism logical within special interest theory frameworkinterest theory framework
Also logical because of complexity of Also logical because of complexity of government spendinggovernment spending
Incrementalism as a rational Incrementalism as a rational economic policyeconomic policy
17-10
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Politics and Federal Politics and Federal BudgetBudget
Changes in politics of budgetary Changes in politics of budgetary process caused byprocess caused by Changes in composition of federal Changes in composition of federal
spending toward social servicesspending toward social services Increasing deficitsIncreasing deficits A drift away from incrementalism as A drift away from incrementalism as
president and Congress attempt to president and Congress attempt to change budget in more radical wayschange budget in more radical ways
17-11
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
EntitlementsEntitlements
Provide funds to individuals meeting Provide funds to individuals meeting eligibility requirementseligibility requirements
Once in effect, level of expenditures Once in effect, level of expenditures depends on external conditionsdepends on external conditions
No fixed budget - expenditures No fixed budget - expenditures relatively hard to controlrelatively hard to control
Add to uncertainty of budgetary Add to uncertainty of budgetary processprocess
Difficult to eliminateDifficult to eliminate
17-12
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Off-Budget ExpendituresOff-Budget Expenditures
Government-owned corporations Government-owned corporations with budgets separate from with budgets separate from government’s budgetgovernment’s budget U.S. Postal ServiceU.S. Postal Service AmtrakAmtrak
Increased dramatically beginning in Increased dramatically beginning in 1950’s1950’s
Activities sometimes placed off-Activities sometimes placed off-budget to reduce scrutinybudget to reduce scrutiny
17-13
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Program Budgets Versus Program Budgets Versus Line Item BudgetsLine Item Budgets
Program budget - groups expenditures Program budget - groups expenditures by program goalsby program goals Enumerates objectives soughtEnumerates objectives sought
Line item budget - groups expenditures Line item budget - groups expenditures by types of items purchaseby types of items purchase Enumerates items purchasedEnumerates items purchased
Program budgets best evaluate Program budgets best evaluate effectiveness of government effectiveness of government expendituresexpenditures
17-14
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Planning-Programming-Planning-Programming-Budgeting System Budgeting System
(PPBS)(PPBS) Government expenditures grouped by Government expenditures grouped by
objective objective Facilitates undertaking of cost-benefit Facilitates undertaking of cost-benefit
analyses of programsanalyses of programs Define objectives, consider alternatives, Define objectives, consider alternatives,
undertake cost-benefit analysesundertake cost-benefit analyses Most useful when considering whether a Most useful when considering whether a
new program should be implementednew program should be implemented
17-15
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Cost-Benefit AnalysisCost-Benefit Analysis
Intended to compare costs/benefits Intended to compare costs/benefits of a programof a program
Requires costs/benefits be estimated Requires costs/benefits be estimated and weighed and weighed
17-16
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Steps of Cost-Benefit Steps of Cost-Benefit AnalysisAnalysis
Enumerate the optionsEnumerate the options Enumerate the costs and benefitsEnumerate the costs and benefits
Avoid double countingAvoid double counting Concentrate on primary effectsConcentrate on primary effects
Convert costs/benefits to dollar termsConvert costs/benefits to dollar terms
17-17
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Cost-Benefit Analysis as Cost-Benefit Analysis as Decision-Making ToolDecision-Making Tool
Results of cost-benefit study can be Results of cost-benefit study can be used as guideline as to whether used as guideline as to whether program should be initiatedprogram should be initiated
Favorable benefit-to-cost ratio may Favorable benefit-to-cost ratio may not imply that program should be not imply that program should be undertakenundertaken
Unfavorable benefit-to-cost ratio may Unfavorable benefit-to-cost ratio may not imply that program should not be not imply that program should not be undertakenundertaken
17-18
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Cost-Benefit Analysis Cost-Benefit Analysis and Public Interestand Public Interest
Cost-benefit analysis is utilitarianCost-benefit analysis is utilitarian Dollar costs weighed against dollar Dollar costs weighed against dollar
benefitsbenefits Cost-benefit analysis should be used Cost-benefit analysis should be used
as a guide to final decisionas a guide to final decision Determination of public interest is Determination of public interest is
normativenormative
17-19
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Discount RateDiscount Rate
Affects cost-benefit analysisAffects cost-benefit analysis Rate of interest at which future Rate of interest at which future
costs/benefits discounted to compute costs/benefits discounted to compute present valuepresent value
Selecting appropriate rate important Selecting appropriate rate important when benefits extend into the futurewhen benefits extend into the future
17-20
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Present Value Present Value Measurement of Costs Measurement of Costs
and Benefitsand Benefits Present value of benefit to be received one Present value of benefit to be received one year from now:year from now: PV = B1/(1+r)PV = B1/(1+r)
Present value of benefit to be received two Present value of benefit to be received two years from now:years from now: PV = B1/(1+r) + B2/[(1+r)(1+r)]PV = B1/(1+r) + B2/[(1+r)(1+r)]
General Formula:General Formula:
T
tt
t
r
BPV
0 1
17-21
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Choosing the Right Choosing the Right Discount RateDiscount Rate
Effects estimate of present value of Effects estimate of present value of projectproject
More important the longer the time More important the longer the time horizonhorizon
Options of choosing discount rate:Options of choosing discount rate: Apply rate on government bonds of Apply rate on government bonds of
same maturity as projectsame maturity as project Use private market interest rateUse private market interest rate
Should be a risk-free rateShould be a risk-free rate
17-22
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Choosing the Right Choosing the Right Discount RateDiscount Rate
Problems when choosing discount Problems when choosing discount ratesrates InflationInflation Discount rate should account for Discount rate should account for
opportunity costs of forgone tax opportunity costs of forgone tax revenues to the governmentrevenues to the government
17-23
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Average and Marginal Average and Marginal BenefitsBenefits
Optimal project produces highest net Optimal project produces highest net benefitsbenefits
Ratio of benefits to costs – ratio of Ratio of benefits to costs – ratio of average benefits to average costsaverage benefits to average costs
Optimal output equates marginal Optimal output equates marginal costs with marginal benefitscosts with marginal benefits
Limitations of cost-benefit analysisLimitations of cost-benefit analysis Difficult to measure costs/benefitsDifficult to measure costs/benefits Does not provide sufficient informationDoes not provide sufficient information
17-24
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
Taxing and SpendingTaxing and Spending
Differences between how political Differences between how political decisions on spending and revenue decisions on spending and revenue generation are madegeneration are made
Spending more susceptible to special Spending more susceptible to special interest activity than taxesinterest activity than taxes