Chapter Eight:

Government Budgeting

Foundations of Modern

Government Budgeting

Pre-Civil War, budgeting informal

Federal budget under $1 billion

Budgetary process fragmented

After 1870s, national economy emerges

Government regulatory power expands

War power, diplomatic involvement expands

Growth in presidential influence

Taxes expand

Foundations of Modern

Government Budgeting

National Banking Act (1864)

In 20th century, changes continue

Increased regulation of private sector

Expanded government role in public sector

Activist presidents

Executive budget

Purposes of Budgeting

Multiple functions

Ledger

Programmatic intent

Controlling bureaucracy, shaping agency

programs

Constant Dollar Spending Growth:

1981-2010

Source: Results summarized from: http://www.whitehouse.gov/omb/budget/fy2012/sheets/hist0123.xls.

Purposes of Budgeting

Partisan conflicts dominate federal

budgets for last 30 years

Contributes to increased spending

Entitlements

Direct spending

Discretionary spending

Projected Spending and Receipts

Summary 2011-2015 (in billions of dollars)

Source: U.S. Office of Management and Budget, Budget for Fiscal Year 2012, Historical Tables.

Purposes of Budgeting

Role of Congress increases Congressional Budget Office

Increased conflicts between president and Congress

Partisan conflicts over deficits

Dissensus over debts, deficits, Medicare, taxation, Social Security and military spending

Government Budgets and

Fiscal Policy

Budgets are fiscal policy instruments

Fiscal policy: government action aimed at development & stabilization of private economy Taxes and tax policy

Direct budget expenditures

Management of national debt

Indirect tax expenditures

Fiscal Policy Tools

Taxation

Recent uncertain national/global economies

raise new questions use as policy tool

Government expenditures

Government spending about 34% of GDP

Major economic implications for many

industries and local communities

Government Spending as a

Share of GDP, 2011

Fiscal Policy Tools

National debt

Limit set by Congress

Indirect but major impact on private

holdings, interest rates, income, spending

Budget deficit

Tax expenditure financing

Monetary and Credit Controls

Federal Reserve System: money supply regulation

Central economic coordination Council of Economic Advisers

Government spending as stimulus

But increase in unemployment brings increase in government spending as revenues decrease

Links to Government Budgeting

Government budgeting directly impacted by tax policy, expenditures, interest group actions, economic coordination

Tax policy decision making (not conducted by budget makers) House Ways and Means Committee

Senate Finance Committee

Links to Government Budgeting

Expenditure policy directly affects

national, state and local communities

Economic coordination: budget is one

tool affecting economic policy

Major policy battleground

Political conflicts

What is spending priority?

The Federal Government Dollar-Where It Comes

From and How It Is Used, 2012 (estimated)

The Process of Budget Making

Institutional conflicts

House and Senate legislative

processes differ

House Ways and Means Committee

Senate Finance Committee

Institutional & political fragmentation

The Process of Budget Making

Budget covers fiscal year (not

calendar year)

Two separate budgets:

Budget obligations

Budget outlays

The Process of Budget Making

Five stages of federal budgeting

1. Preparation

2. Authorization

3. Appropriation

4. Execution

5. Audit

Step 1: Budget Preparation

OMB sends out call for estimates

Budget examiners hold hearings

OMB then issues circulars (directives)

Examiners make recommendations to

OMB

Single budget document submitted to

Congress

Step 2: Authorization

Sets budget caps for programs

Responsibility of standing committees in both House and Senate Makes recommendations to full chamber

Conference committees work out details

Authorization bill forwarded to chief exec

Some programs receive standing authorizations

Step 3: Appropriations

Most crucial stage

Grants actual program funding (by

appropriations committee in House

and Senate)

Backdoor financing can occur

Entitlement program funding set by

law (often tied to inflation)

Conflicts over Fiscal Control

Fragmented authority in budgeting

means fragmented control over

national government spending

Role of iron triangle

Congressional Budget and

Impoundment Control Act of 1974

restored some control to Congress

Conflicts over Fiscal Control

Balanced Budget and Emergency

Deficit Control Act of 1985 (GRH Act)

Mandated budget reductions, but made

allowance for exemptions

Sequestration

Reconciliation

Conflicts over Fiscal Control

Budget Enforcement Act of 1990

Amended the GRH Act

Limited some discretionary spending

Pay-as-you-go procedures (PAYGO)

Steps 4 and 5: Execution and Audit

Execution:

Money apportioned from Treasury quarterly

Spending monitored by OMB, GAO and

congressional committees with jurisdiction

Wide administrative discretion in spending

Steps 4 and 5: Execution and Audit

Audit

Informal within agencies

Formal by auditors, OMB and GAO

Legislative oversight

Increasing use of performance audit

Budget Approaches in the

Executive Branch

Commission on Economy and

Efficiency (1909) recommends budget

process under presidential direction

Harding administration institutes

formal executive-budget system

Line-item budgeting

Executive office control

Budget Approaches in the

Executive Branch

Performance budgeting (New Deal) Centralized coordination and control

Executive Office of the President (1939)

First Hoover Commission Supports performance budgeting

Recommends Bureau of Budget expansion

Budget and Accounting Procedures Act (1950) focuses on efficiency

Budget Approaches in the

Executive Branch

Planning–programming–budgeting

(PPB) emphasis is economic (1960s)

Hopes to instill coherence, consistency and

rationality

Less politics, more “rationality”

Congressional resistance

Budget Approaches in the

Executive Branch

Zero-base budgeting (1970s)

Identify decision units

Analyze decision units, formulate decision

packages by knowledgeable manager

Rank decision packages by priority for

funding

Budget Approaches in the

Executive Branch

“Reaganomics” (1980s)

Tax cuts benefit affluent

Composition of budget altered (increase in

defense spending, decrease in domestic)

Clinton administration emphasized

budget priorities in education, job

training, technology and public works

Budget Approaches in the

Executive Branch

G.W. Bush increased discretionary

spending (military support)

Obama’s Fiscal Responsibility

Commission

Broader the recommendations, the lesser

the chance for full implementation

Budgeting and Resource Scarcity

Advent of absolute scarcity

Declining growth rates

Tax base shrinkage

Rising inflation (plus recession)

Competition increasing for declining

resources

Budgeting and the Future

In constant dollars, how high is government spending? Other industrialized nations collect and

spent larger percentage of their GDP

Private economic performance critical to national budget

No entitlement is guaranteed and no expenditure is uncontrollable

Budgeting and the Future

Budget process remains area of major government focus and concern Fiscal conservatives often advocate

strengthening president’s authority

Congressional involvement limits reform

Summitry (but little recent domestic diplomacy)

Current budget conflicts reflect current political conflicts