Chapter 11: Budgeting

1. Chapter 11: Budgeting

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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.

8. 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

9. 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.

10. 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.

11. 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

12. 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.

13. 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.

14. 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

15. Budget Appropriations • Budget submitted by the president is a set of recommendations. • Congress authorizes expenditures and determines how revenues shall be obtained.

16. 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.

17. 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

18. 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

19. 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.

20. 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

21. 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.

22. 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.

23. Budget Execution (continued) • Impoundment Control Act distinguishes between: • Rescissions: permanent suspension of outlays • Deferrals: temporary suspension of outlays

24. 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.

25. 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

26. 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