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