government budgeting denhardt - chapter 5. government budgets and the economy when economy grows,...
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Government budgetsand the economy
When economy grows, tax revenues increase– Personal income, sales tax– Tax rates can be lowered
As the economy shrinks, tax revenues will fall
– Should taxes be raised to make up for the shortfall?– Raising taxes can further decrease personal incomes, thus
increasing economic instability
Keynesian economics
Rapid economic growth high inflation
Inflation decreases buying power– Worst for those on fixed incomes
Less buying power high unemployment– Hurts individuals and government– Increases welfare burden
Federal Government
Federal spending decisions play a major role in the economy
– Accounts for over one-third of the GNP– Federal government by far the largest corporation in the
world – ten times size of GM
Budget is an instrument of public policy
– Programs that are “in” get funded
Deficit spending: Federal government can spend regardless of revenues
State Governments
State and local expenditures account for 15 % of GNP
State budgets limited as most States cannot engage in deficit spending (can’t spend more than they take in during each budget cycle)
Sources of funds
Taxes
– Proportional – everyone taxed at same rate– Progressive – higher rates on higher incomes– Regressive – flat tax
Automobile registration and license fees - persons with lower incomes pay a proportionately higher rate of their income
Taxes
Types of taxes
– Personal income
Largest single source of Federal income (41 %)
progressive – higher rates for higher incomes
– Corporate income
also progressive (10 % of Federal income)
Frequently avoided through tax shelters and credits
Taxes
Social insurance payroll taxes (34 % - 2nd. largest source)
– Social security, health care, etc. (flat rate, regressive)
Sales and excise
– Sales tax is a state and local form of revenue– Excise tax is Federal (3 % of Fed. income)
applies to sales of commodities such as gas, liquor
– Both are regressive (poor consume a greater proportion of their income than the rich)
Taxes
Property taxes
– Provide about half of local government revenues– Evenly split between residence and business– Progressive (higher tax on more exp. homes)– Limitations on assessment increases
Calif Prop 13 (1978)– limited to one percent of assessed valuation– cannot increase more than two percent per year
Other revenue sources
Fee for services
– Regressive – all pay the same regardless of income
Lotteries
– Can be very regressive - poor play more– Other costs
Welfare Crime Burden on local services
Government spending:Mandatory
Two-thirds of the Federal Budget is mandatory spending
Entitlement programs take fifty percent of the Federal budget– Provide specified benefits to those who meet requirements
(Social Security, Medicare, Veteran benefits)– Spending can vary year to year as size of group changes– Usually indexed to the cost of living
Interest on national debt (fourteen percent of the Fed. Budget)
Farm price supports
Government spending: Discretionary
Accounts for one-third of the Federal budget
Defense (15 percent of Federal budget)
Domestic programs (17 percent of the Federal budget)
October-October budget cycle is seldom met
– Federal government usually winds up on a “continuing resolution” (CR) for several months into the fiscal year
– CR’s limit spending to previous fiscal year’s levels
Deficit spending
Large deficits may limit economic recovery– Govt. money not available for buying new goods & services– Govt. borrowing uses up available funds, drives up interest rates,
makes it tougher for businesses to borrow and limits private expansion
Clinton’s last budget was balanced & projected a modest surplus Current budget is seriously out of whack
– Actual 2003 deficit was 375 billion dollars– Projected 2004 deficit is 477 billion dollars
National debt is a different issue from the deficit Sum total of outstanding Government securities and financial
obligations Huge – almost 8 trillion dollars
Debt reduction strategies
Goals– spur economy– lower interest rates– calm financial markets
Clinton plan – reduce outlays & find new sources of revenue– Increase corporate tax rate– Increase personal tax rate for higher earning families– Freeze defense spending and reduce Medicare increases
Bush administration reversed course– Tax reductions to spur the economy– Final measure was a $1.3 trillion cut over 10 years
State spending
Intergovernmental transfers: States and local governments pass through a lot of money from the Fed. Govt.
– States control a lot more spending than just their own funds– Thirty percent of education money is State & local– Including pass-through Federal $, States control 70 percent
of all money spent on education in the U.S. Including pass-through Federal $, State & local governments
spend money in this order:– Education– Public welfare– Highways
Budget cycle:Step 1 - Formulation
Fiscal year Agencies prepare proposals and forward to central office Chief executive may share decision-making with other elected
officials and legislators Federal formulation
– Cycle begins with OMB (works for President) Projects Government income and expenses Analyses agency programs, performance, needs and
priorities Special attention to President’s policy concerns
Federal formulation (cont’d)
– Agencies negotiate requests with OMB– Final decisions made by President– Budget document presented to Congress– Committees in House and Senate hold hearings
Agencies, interested parties, lobbyists and interest groups have their say
– House and Senate vote on funding bills Usually need to be reconciled by a “conference
committee” Congress aided by Congressional Budget Office, their
equivalent of the OMB
State formulation
State practices vary
– Deficits usually prohibited
– Governors generally have line-item veto power (President does not)
Budget cycle:Step 2 - Execution
Apportionment – funds generally allocated to agencies by quarter
Preaudit – review before spending to insure that funds will suffice and that expenditures are proper
Supplemental appropriation Reprogramming – diverting moneys to other projects Impoundment – withholding of funds by chief executive in case
revenue projections fall low or goals of program already reached
Deferrals – temporary, either house of Congress can veto Recissions – permanent – must be approved by both houses of
Congress
Budget cycle:Step 3 - Audit
Post audit– After fiscal year ends, to verify expenditures are proper
Performance audit
– Reviews of agency operations (not just financial)
Who conducts audits?– Federal
GAO GAO Performance Audits
– State California State Controller
Budgeting approaches:Line-item budget
Each budget modeled on the previous
Based on experience and projected change
Organized by functional units or departments
Within departments, organized by expense categories
Pluses: allows close control and tracking of expenditures
Minuses: poor management tool (ignores performance)
Budgeting approaches:Performance budget
Organized around programs or activities, not departments
Focus is on work processes – not mission or goals
Performance measures reflect accomplishments and costs– Program: Highway safety– Subprogram: School visitations– Cost: 27 visits @ $250
Issues– Emphasizes what is measurable - quantity rather than quality– Programs cut across organization structure, difficult to assess
responsibility
Budgeting approaches:Program budget
Unifies planning, systems analysis and budgeting Each agency has a mission statement that identifies goals Budget sets out objectives that must be met to accomplish
these goals Agencies evaluated on meeting their goals and objectives
– Performance budget – focus on process – measure success of sanitation department by # of garbage collections
– Program budget – focus on purpose – measure success of sanitation department by rate of infectious disease
Advantages: Focus on benefits of govt. activity Disadvantages: Cost and complexity
Practical exercise
Budgeting approaches:Zero-based budget
Basis: Identify “decision units” – the lowest point in the org. at which significant program decisions are made
Managers of decision units prepare packages
– Describe programs– Estimate costs and benefits– Identify alternatives & justify proposed approach– Specify required funding for minimum, current and optimal
operations
Decision packages ranked by top management and legislators
Budgetingpolitics
Agency managers typically seek to expand– Try to classify as many activities as possible as part of their
program’s “base” – elements that are continuously funded without opposition year after year
– Try to get a larger share of agency resources
Tactics– Look for support inside and outside their agencies– Padding– “Camel’s nose” – getting a foot in the door, then expanding
Financial management –Fund-based accounting
Government budgets are deposited into specific “funds” to assure overall agency accountability for expenditures
Funds represent functional areas
– General funds for routine agency activities– Restricted funds for specific uses (separate fund for gas tax
revenue)
Proprietary funds hold profits (e.g., transit systems) Fiduciary funds hold individual assets (pension funds) and
moneys collected for other governments (property taxes collected by a county for the State)
Financial management –Risk Management and Purchasing
Risk management
– Identify potential areas of loss– Try to reduce probability or mitigate losses
Purchasing
– Centralized purchasing by experts– Cooperative purchasing
PROGRAM BUDGETING PRACTICAL EXERCISE
You are developing a program budget for a public agency. For your assigned agency:
1. List three to five goals
2. For each goal, list three to five objectives
3. For each objective, give three to five examples of a specific expenditure
Team 1 - City streets department
Team 2 - Fire department
Team 3 - Police department
Team 4 – School district
Team 5 – Parks and recreation department Return toslide show