An Overview of Public Budgeting

Public budgeting is one of the most critical aspects of public administration and public policy.

Public budgeting is much more than accountants sitting around making entries into the books or working with spreadsheets on computers.

A public budget is a document or a plan for how government will spend the public’s money and how it will generate the funds needed to pay for services for the next year.

Governments collect revenues, mainly through taxes, and then spend those revenues on a varied array of services and projects.

If they spend more than the available revenues, they must borrow money to pay for the deficit.

If the money left over, that is a surplus and it needs to be allocated properly or returned back to the tax payers as a rebate.

The most simplistic way to think about the basic accounting in budgeting is revenues mines expenditures equal the surplus or deficit.

When the budget is done, the income calculation is approximate; not exact since it is unknown how much the income or revenue will be next year.

Public budgeting is a highly political process where public policy comes to life.

When policy makers and politicians make budgetary decisions, they are making policy decisions, and interest groups appear to make sure that their special interests are accommodated.

The process involves who is going to get whatever there is to get from the legislature.

If a person wants to know what the nation’s commitment is to national defense, finding a cure for cancer, child care, education, and the like, they can find it in the budget.

In most countries, the budgetary process involves such decisions as the “guns-or-butter” debate.

That is, how much will be spent on the nation’s defense versus how much will be spent on welfare-related programs?

The budget is a plan, but it is also a commitment for education programs, highways and transportation projects, and research and development.

Budgeting is more than just a document; it is a written record of public policy.

Different Ways to Think about Budgeting

Public budgets can be seen from at least five different perspectives.

Budgeting is a way to manage the economy.

The major objectives of budget policy involve three very important goals.

They include allocation of resources, distribution of resources, and stabilization of the economy.

Fiscal policy greatly influences the economy because it directly affects the collection and expenditure of public money.

In theory, public financing holds that citizens must pay for the services needed to maintain society.

The tax and spending policy of government can be used to manage the overall economy.

British economist John Maynard Keynes argued this point more than 80 years ago.

Stated simply, when the economy is booming, government collects more revenue.

During times of recession, the economy can be “pumped and primed” by giving tax breaks and incentives to stimulate economic activity.

When the economy is performing poorly, government incurs more welfare-related expenses and unemployment benefits.

This also can help to stimulate the economy because those receiving benefits spend their money in stores, which has a multiplier effect in the economy.

During recession, government usually spends more than it collects because the economy has stagnated.

During those times, government usually operates with deficit spending until the economy recovers.

The fiscal policy of government can greatly affect the length of a recession, relieve human suffering during hard economic times, and help the economy to recover.

Once the “business cycle” starts moving upward again, the economy begins recovering; and once the recovery is over, government tax collections increase.

As Engels indicated, in capitalism the business cycle is well known for its boom-and-bust characteristics.

There is one reality that is the actions of government are important in determining the path that economy takes.

Supply-side theory holds that government should minimize its presence in the economy by keeping taxes low and watching the supply of money.

Any intervention on the part of government, which is discouraged, should be to aid producers rather than consumer.

This idea is associated with fiscal conservatives.

Supply-side theory is a contemporary version of classical economics, which is associated with Adam Smith and other classicists like David Ricardo and Jean Baptiste Say.

It is sometimes referred to a laissez-faire economics, but critics have called it trickle-down economics because it favors business and the wealth.

Demand-side economics, which is associated with the work of John Maynard Keynes, holds that supply is meaningless if there is no demand.

He argues that government must play an active role in the economy during recessions or depressions, and that fiscal policy can be used to manage the economy.

Government must intervene to help relieve the suffering of consumers.

The monetarists, associated with economist Milton Friedman, believe that neither supply nor demand-side economic theory is adequate; the key lies with the supply of money.

As the economy grows, the supply of money should grow and if the economy shrinks, the supply of money must be reduced; if not, inflation occurs.

The goal of fiscal policy is to produce a healthy, growing economy with low unemployment and low inflation.

Budgeting is also a way to choose among competing alternative priorities.

Do we invest in large-scale nuclear energy projects to ensure that the nation does not have “blackouts”?

Do we build more submarines or increase health care benefits for the nation’s senior citizens?

Do we help farmers or do we help cities?

Do we fight the war on illegal narcotics or do we build more public transportation light rail system?

The examples like these could go on and on, but one thing is a reality that is budgeting involves choices among competing goals.

It also involves a clash of values over how the money should be spent, on which programs and projects, and how the revenue should be raised.

Do we spend billions of dollars to build space shuttles and explore space, or do we put the money in superfund projects to clean up pollution?

Budgeting is where ideological clashes occur over what is important and what will be secondary in public policy.

Thus, budgeting is a power struggle among competing priorities and interests.

This includes the agencies of government that must lobby to ensure that their funding continues.

Budgeting is a way to review and control the agencies of government.

Agencies depend on the funding from the legislature to function, and the legislature can hold them accountable for poor performance.

Thus, budgeting is a form of control.

In a similar vein, budgeting is also a tool of management.

Public managers use their budgets to manage their agency.

The budget is a financial plan that includes categories of expenditures that are used to carry out activities and implement public policy.

Budgeting is a form of accounting.

A budget is a comprehensive statement about what government did last year and the plan for the next year.

It lists all revenues and expenditures, often line by line.

It serves as a public statement of government activity in which the activities of government are documented by a complex system of governmental accounting.

The Budget Cycle

The budget cycle is the process in which the budget is planned, prepared, debated, adopted, implemented, and audited.

Budget cycles typically contain several distinct but overlapping phases: It includes preparation and formulation, legislative review, budget execution, and audit and evaluation phases.

Budgets generally follow a fiscal year, which is an accounting cycle.

In the US fiscal years vary from state to state, but most governments use July 1 through June 30.

The federal government uses a different cycle that runs from October 1 through September 30.

In Turkey, the fiscal year starts on January 1th and ends on December 31th.

The first phase of creating a budget is preparation and policy formulation, which involves making revenue estimates, gathering expenditure requests from agencies, and dealing with the requests of interest groups.

Budget offices, in the US at the federal level, the Office of Management and Budget (OMB), gather and assemble the information needed to put together a proposed budget.

The information must be analyzed to ensure that the projected revenues will cover anticipated expenditures.

The second phase is legislative review.

Although the budget is submitted to the legislature, executive-legislative relations continue throughout the process, particularly in the US.

This phase involves assembling the final budget, holding hearings, listening again to requests from interest groups and agencies, and legislative debate.

Public policy is also finalized in this process.

After the debate is over, the budget is approved by the legislature and signed by the chief executive.

At this point, the budget has been formally adopted.

The budget is then executed (implemented) and funds become available for agencies to spend in executing public agencies.

Depending on the government, funds may be earmarked for agencies or transferred to agency accounts.

After the fiscal year ends, the process of auditing and evaluation begins.

Often auditors have just completed the previous year’s evaluations, so auditing and evaluation is an ongoing process.

The auditing process involves not only traditional accounting checks and verification, but also evaluation.

Evaluation often involves cost-benefit studies and detailed analysis to measure the performance of programs.

Auditing is conducted to ensure that funds were spent properly and that procedures were followed.

The US has zero-sum model budget which is also called pay-as-you-go (PAYGO).