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 fair-share 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