510 forum

Introduction

Topics to be covered include:

· Neutrality vs. politics in budgeting (guns or butter)

· Budget process

· Budget purpose and theory

· Types of budgeting

 

Budgets are both a political and technical process. Understanding how budgets and the budget process are used to advance a political agenda is an important part of public administration. Public administrators, in the quest to separate politics and administration, have developed a number of types of budgets and budget processes. Economists have created several major theories of budgeting that public administration, legislators, and government use to drive the public budget process and use budgets to effective ends. The theory is explained by knowing the difference between debt, deficits, and revenue and how they function together. Finally, we will look at the types of budgets that have evolved over the years that give administrators options in how to best use public funds and serve the public.

Neutrality and Politics in Budgeting

Budgets are a way to plan how money is spent and where revenues will come from. Which services will be paid for and at what level? Will the government fund some programs and not others or prioritize some for higher funding? Who will benefit from the budget decisions and what political interests will that serve?

Public administration, especially at the local level, tries to make budgets and services a nonpartisan issue, meaning it is not politicized. An old axiom of local politics says, there is no Republican or Democratic way to fix a pothole. Cities even went so far in the reform era to make their elections nonpartisan, since elected officials were dealing with services to deliver to everyone in the city. Of course, potholes can be unequal. If a road has not been maintained, it is more likely to get a pothole. Certain areas of a city may not get as much maintenance as others or receive attention as quickly as other parts.

Political parties at the state and federal levels of government wage strong defenses of their budget priorities. The process set up for passing a budget in the Congress or state houses are routinely manipulated to serve the majority party and their budget preferences. In Congress, this often leads to continuing resolutions rather than a new budget bill - because the two parties cannot find enough common ground to send a budget to the President. Despite the partisan hostilities, budgets politics also can be framed as a tradeoff. In an earlier lesson, we covered logrolling and other measures to trade favors to get enough votes to pass a bill. In budgets, it takes on an additional level of a  trade-off . For instance, if one group of Congressional representatives are adamant about health care and another group is equally set on funding defense items, they might compromise and trade off some health care for defense spending and vice versa. Each takes a little less and both sides get something. In classical economics, this is referred to as “guns vs. butter.” It suggests that politicians who want guns (or defense expenditures) must compete with those that are more interested in butter (civilian goods such as agriculture or health care for instance). View this discussion about federal budgeting politics to learn more about the “guns vs. butter” debate:  MSNBC: The New Guns vs. Butter Debate

Budget Process

Whether it is local, state, or federal government, the representatives elected must pass a bill that includes the annual budget and generally, this must be signed off on by the executive. In Congress, the House of Representatives starts the passage of all appropriation bills. Each appropriation bill covers a portion of the federal budget, such as agriculture, defense, housing or health. Once the House of Representatives holds committee hearings, the House will eventually pass a bill and send it to the Senate. They, likewise consider the bill and either pass it or create their own version. Once the House and Senate agree and all the appropriations bills are passed, the new budget is sent to the President for approval or veto. There are many permutations of the budget process, including the threat of a veto by the President, the inability of House and Senate to agree, and even the inability of the House to pass any appropriation bills for Senate consideration. When a stalemate occurs, the House and Senate may agree to a  continuing resolution . This is a bill to continue the current budget for a prescribed period of time until a new budget can be agreed to. A continuing resolution allows the government to continue paying its “bills” such as employee salaries, purchasing goods and services, and other essential services. When a continuing resolution is not agreed to, the government may actually shut down for a time. In 2013 the government shut down for 2 weeks while trying to agree on health care and other spending priorities (Lowery & Shear, 2013). Eventually, Congressional leaders and the President agreed to the Continuing Appropriations Act (2014) in order to reopen the government. A shutdown usually exempts essential services such as maintaining defense installations, processing social security checks and security.

The Role of the Executive

There also is a role for the executive (the President) in the budget process.

“In 1910 President Taft initiated the Commission on Economy and Efficiency (often referred to as the Taft Commission). The Commission’s report entitled The Need for a National Budget, was presented to Congress in 1912 and thereby focused national attention on budgeting and sound fiscal management. Among the major recommendations made were the following:

· The President should prepare and present a budget to Congress (the executive budget idea).

· A budget message should accompany the budget and should outline policy proposals of the President as well as include summary financial information.

· The Secretary of the Treasury should submit a consolidated financial report to Congress.

· Each agency should submit to Congress an annual financial report.

· Agencies should establish and maintain a comprehensive accounting system” (Cozzetto, 1995, pp. 20-21).

Today, the President presents his proposed executive budget to Congress each year through the Office of Management and Budget (OMB). It represents the President’s political agenda and recommendations from the Cabinet Secretaries that oversee the executive agencies and departments of government. Congress has the option to consider any or all of the contents or not use it at all. Of course, considering that the President must sign the final budget legislation, it is expected that the legislative and executive branches will work together on a mutually agreeable budget. The annual executive budget can be found at  The White House, OMB, Budget . Executive budgets are used at the state and local level with the exception of states or cities that have structures in place that do not call for an executive budget. Governors generally use a state-level version of the OMB to prepare their budgets. To get a more in-depth understanding of the budget process at the state level, the National Association of State Budget Officers surveyed all 50 states to generate a comprehensive look at practices and policies:  Budget Processes in the States

Budget Differences between Government Levels

The federal government and state and local governments have one very important difference. The federal government may run an annual  deficit , while state and local governments must have an annual balanced budget. The deficit is the difference between what the government spent minus revenues. The federal government may run a deficit due to national emergencies such as war, national priorities such as overcoming unemployment, or because of political disagreements that require running a deficit rather than shutting down the government. Since the federal government is the national treasury, it can allow itself to run a deficit over several years if necessary, until such time as economic conditions improve and the budget can be balanced or run a  surplus . A surplus is when revenues exceed expenditures in a single year. President Ronald Reagan used a famous analogy of balancing the household checkbook in his admonition to Congress to balance the annual budget. Unfortunately, his analogy is not accurate, because households cannot invent more money as the federal government can and have investors buy the debt, which actually adds to the economy.

Deficits

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· Debt vs. Deficit

The deficit is not the same as government  debt . The debt is what the federal government owes in terms of borrowed money. The treasury borrows money (or sells the debt) from investors and pays it back over time. This would be akin to a household mortgage. You borrow money to buy a house and pay it back over 30 years. However, with the government, the debt keeps building over time and the  national interest on the debt  keeps getting larger. It is a significant line item in the federal budget. It is the amount of money paid to investors each year for borrowing their money to fund the debt. If you keep adding to your mortgage each year with new home equity loans, you will increase your household debt. If you continue to charge items on credit cards, your monthly payment grows along with the interest the credit card company charges. You have a credit limit while the federal government does not. The U.S. government debt as of 2017 was approximately $20.1 trillion dollars according to the U.S. Department of Treasury (Treasury Direct, 2017).

Debt Ceiling

The  debt ceiling  is an arbitrary upper limit of the total amount of debt the government can have, as enacted by Congress and signed by the President (U.S. Department of Treasury, 2017). It is a political agreement that the debt will go this high and no further. Of course, Congress and the President can increase the ceiling whenever they agree to, but it requires a legislative change to the budget. If the debt ceiling is not raised, it can cause a government shutdown because the federal government would start defaulting on its debt if it exceeds its debt limit. The debt ceiling has become a bargaining tool forcing Congress to find compromises on spending priorities. One side agrees to a debt ceiling increase if the other side will agree to support their budget requests. If they cannot come to an agreement, then the budget negotiations continue, the debt ceiling is reached, and the government must shut down until an agreement is reached.

Balanced Budgets

As mentioned earlier, state and local governments may not run an annual deficit. They must balance their budgets each year. However, they may incur debt, usually for large projects such as roads, bridges, building schools and water systems. That debt must be financed with dedicated resources and is carefully assessed by private debt service companies who rate the solvency of the city, county, or state government that is going into debt based on their capacity to pay it back. Most state constitutions require an annual balanced budget for the state and for the cities, counties, and other municipal entities within the state. For this reason, states rely on the federal government for emergency funding such as when disasters hit (earthquakes, tornadoes, hurricanes), when health emergencies occur (Zika virus, Ebola, E.coli outbreaks), or when civil unrest occurs and military assistance is needed, such as when military units are called in to stop riots. The Federal Emergency Management Administration (FEMA) is the common face of the federal government when disaster strikes.

Budget Theories

Many roads like this one were built by men employed through the Works Progress Administration.

Not only did the New Deal of the 1930s get people working, but it was a major economic stimulator. Since that time, the economy has grown and recessed, often with the use of federal spending as the catalyst.

Budgets keep departments, agencies, and programs on track by defining what they can spend money on, how much can be spent, and in some cases, what the unit is responsible for producing as a function of spending that money. Let’s examine two theories of using the budget for economic stimulus:  Keynesianism  and  Reaganomics .

In the 1930s the United States was in a deep financial depression with high unemployment and low availability of capital to get manufacturing and jobs moving again. People needed housing, food, medical care, and most importantly jobs. John Maynard Keynes, an economist, proposed that government spending, even if it was in excess of currently available revenues, would be a beneficial way to jumpstart the economy and accelerate the growth of revenues (Keynes, 1930). If people have jobs, they can pay their bills and buy durable goods. The demand for durable goods (like furniture, cars, houses, and appliances) would accelerate manufacturing. People also buy general goods and services such as food and clothing. This would accelerate other manufacturing and retail. If people are not buying things, they are not paying sales taxes. If they are not working, they are not paying income tax. Here is a quick video primer on Keynesianism:  What is the Keynesian Theory?

Keynes’ theory was (and still is) controversial. If the government borrows money because of its deficit, would it leave enough capital for loans to be made for factories and houses? The answer was yes, as long as the treasury committed to creating more available dollars.

Ronald Reagan

While there are many adherents to the Keynesian theory of using federal spending to stimulate the economy, there are many detractors as well. In the 1980s, President Ronald Reagan sought to reduce the size of the federal government and shrink the national debt. He proposed that instead of deficit spending, the federal government should implement significant tax reductions (Domitrovic, 2014). His assumption proposed that companies and citizens would use the income they did not spend on taxes on purchases and investments that would stimulate the economy. Companies would reinvest the money and hire more people in order to grow their businesses. People would increase their consumer spending, buying more goods and services, thus stimulating demand in the economy. Laffer asserted that if tax rates were too high, people would have no incentive to work more and companies would have no incentive to grow because in both cases, their extra revenue would be consumed by higher tax rates. President Reagan and Congress instituted significant rollbacks in federal spending and implemented tax cuts in order to grow our way out of the inflationary recession of the 1970s.

British Prime Minister Winston Churchill opposed governments trying to spend their way to prosperity. He said, “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle” (Churchill, 1905).

Policy Implementation

Budgeting is a policy implementation tool. If the current policy is deficit spending to stimulate the economy, the budget reflects that and vice-versa for a tax-cut approach to stimulate the economy. Remember, though, that annual deficits are added to the long-term debt. Included in the budget is a line item to continue paying interest on that debt (as you would pay credit card or mortgage interest). However, government debt is not the same as personal debt. There is no bill collector coming to the federal government. For instance, if a state government sees that revenues will not be as high as expected, then the state must by law adjust its spending for the year to prevent a deficit. This spending change has an immediate impact on the state. Services must be cut back, employees may be laid off, supplies may not be available for schools.

Budgets have winners and losers, meaning some interests are funded and some are not. Special projects receive funding and some that have lobbied for funds are not funded. Advocates for particular interests such as health care or environmental protection will lobby for specific budget requests. In addition, companies such as military contractors also lobby for specific items in the budget that their company will bid on.

Elements of Budgeting

Let’s look at the elements of a budget. First, there are capital budgets and operating budgets. The federal government does not make a distinction between capital and operating budgets because they do not use bonded funding as states and cities do. Capital budgets (used by state and local governments only) are for long-term construction projects such as roads or buildings.

These are generally fixed decisions that may require adjustment, but not elimination. Operating budgets fund most everything else: government workers’ salaries, office operating expenses, consumable supplies, and services to citizens. First, we will look at two types of expenditures.

Fixed spending  covers any obligation that cannot be changed significantly from year to year – it could include federal contracts underway for highways, entitlements such as Medicare or welfare, or veteran benefits.  Discretionary spending  is costs that can be readily or drastically altered in a budget year. Programs can be eliminated or significantly reduced such as changes to environmental protection, the space program, or education funding. Reductions in the workforce also can be made by eliminating administrative staff, military forces and government employees. Reductions in annual spending also could be created by not filling vacant positions or inducing retirements. Each categorical item in the budget is generally referred to as a  line-item . Items may be organized within each program or maybe by categories of general spending such as staffing, travel, equipment or supplies.

There are several types of budgeting to explore, such as incremental, zero-based, performance budgeting and planned programming budgeting systems.

Incremental Budgeting

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· Uses Past to Predict Future

Incremental budgeting  is the common form of budgeting. While it may be considered a normative theory, for practical purposes, incremental budgeting is an empirical tool.

“Incremental budgeting models employ past budget decisions as independent variables” (Tucker, 1982, p.328).

Once a government budget is set, be it for an individual department, agency, or program, it usually only changes incrementally from year to year. The incremental change may include cost-of-living adjustments, salary increases, or utility cost increases. Tucker (1982) points out that there is disagreement about what constitutes the size of a budget change and if it qualifies as incremental. He points out that it is the regularity of the budget decision process for an item that qualifies it as incremental (linear and longitudinal) (Tucker, pp. 328, 333).

Line-item Budget

A line-item budget is a common form of incremental budgeting. Small or routine adjustments are made each year to each line item. The budget is shifted incrementally each year and may not demonstrate any significant change.

Disadvantages

Incremental budgeting generally does not make major shifts in budget priorities. Because it relies on routine and incremental adjustments, there is little room to account for major policy changes that would add significant new items or shifts in political priorities.

Entitlements

Entitlements and fixed costs leave less and less room for incremental adjustments.

“The inadequacy of spending increments also has eroded central budget control. During much of the post-war era, central budget offices influenced government priorities by concentrating on the increment – the additional amounts to be spent in the next or subsequent budgets. Although the increment may have been small relative to the totals, it was the portion that politicians and spending agencies cared about the most. By allocating the increment, the budget office determined which programmes would grow and which initiatives would be undertaken” - Allen Schick (2001, p. 11).

The major criticism of incremental budgeting is that it leaves little room for major examination of needed changes. There is no mechanism in the process to re-examine budget priorities.

ZBB: Zero-based Budgeting

The lack of examination led to the adoption of zero-based budgeting (ZBB). This type of budgeting originated in the business world in the 1960s and represented a significant change in thinking about what a budget can accomplish from year to year. President Jimmy Carter instituted the use of it in the federal budget process during his term (1977-1981) (Tyer & Willand, 1997). Rather than being an accounting mechanism where political adjustments are made around the edges, zero-based budgeting requires all budget program areas to justify their annual appropriation. Instead of starting with last year’s funding level as the base and adding a small increment to that, zero-based budgeting resets each program to zero and the current assessment of the program determines what level of funding is justified. During times of government fiscal retrenchment, ZBB seemed like a promising process to make difficult budget decisions (Tyer & Willand, 1997).

While most programs would not actually be zeroed out for the coming year, the exercise of budgeting profoundly changed. Managers had to delineate why they were spending the money they were spending and in the way, they were spending it.

ZBB challenges the status quo, which some managers see as an optimal approach that requires a bottom-up engagement to the budget process. Others see it as too disruptive, costly, or a hollow exercise, that is not as meaningful as it sounds. No one expects that the Army will be zero funded. Nor do they expect there to be a justification for significant changes. Therefore, the actual process of ZBB proved to be of less value than originally thought.

Performance-based and Planned-programming Budgeting

Governments have used a variety of other budget types such as  performance-based budgeting  and  planned-programming budgeting system  (PPBS).

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· Performance-based Budgeting

Performance-based budgeting is an enhanced form of incremental budgeting. The increment increase in any budget item must be justified based on the expected increase in performance or output in that area (Schick, 2002, pp. 42-43). For example, if an additional staff person is funded, what is the expected output? This output must be a measurable – more people being served, a reduction in illiteracy, and improvement in water quality – to justify the amount of money being spent.

Not surprisingly, “spending agencies are uncomfortable with breaking down their work into standard units, and also uncomfortable with the notion that the amount they get should depend expressly on the amount they produce” (Schick, 2002, p.43).

The main impetus to adopt performance-based budgeting is to improve efficiency.

“Governmental expansion during the New Deal and World War II led to a wider interest in performance budgeting in order to more efficiently use financial resources. Thus, it focused on activities and outputs, things that could be identified and measured” (Tyer & Willand, 1997).

Planned-programming Budgeting

Robert McNamara introduced planned-programming budgeting into federal government budgets in the 1960s while serving as Secretary of Defense. President Johnson extended it to all the federal departments to create the overall government budget. This is a highly rational system based on data and systems.

PPBS used the “analytic concepts…[of] multi-year analysis and projections of costs and benefits. Along with this went systems analysis and operations analysis using new data technology” (Tyer & Willand, 1997).

Computers were evolving along with the ability to do the sophisticated statistical analysis.

Government Performance and Results Act

Performance budgeting made a comeback in the 1990s as New Performance Budgeting when the Government Performance and Results Act of 1993 was enacted. The expectations are for each agency to manage their budget planning using performance measures and enhanced data, focusing on outcomes. It took the systems approach from PPBS and focused on performance outcomes, creating the best of both budget types. As with earlier efforts at measuring performance, the details of doing it well were elusive.

The Congressional Budget Office upon review found, “the greatest obstacle ... was the identification of the measures themselves, in large part because at the national level "so many programs [are] influenced by other actors, including state and local governments, private businesses, and individuals" (Congressional Budget Office, 1993: 44 ).

Entrepreneurial Budgeting

Performance budgeting became entrepreneurial budgeting at the state and local levels.

“Managing for results and performance measurement are the focal point in many states as they prepare to enter the 21st century” (Tyer & Willand, 1997, np).

In 1998 the Government Finance Officers Association (GFOA) issued a report outlining the steps necessary to take on this budgeting challenge. They recommended four overarching budgeting principles and 12 elements that should be included in what Tyler & Willand (1997) call “New Performance Budgeting.”

THE FOUR PRINCIPLES OF THE BUDGET PROCESS

ESTABLISH BROAD GOALS TO GUIDE GOVERNMENT DECISION-MAKING

DEVELOP APPROACHES TO ACHIEVE GOALS

DEVELOP A BUDGET CONSISTENT WITH APPROACHES TO ACHIEVE GOALS

EVALUATE PERFORMANCE AND MAKE ADJUSTMENTS

THE GFOA 12 ELEMENTS OF THE BUDGET PROCESS

ESTABLISH BROAD GOALS TO GUIDE GOVERNMENT DECISION MAKING

DEVELOP APPROACHES TO ACHIEVE GOALS

DEVELOP A BUDGET CONSISTENT WITH APPROACHES TO ACHIEVE GOALS

EVALUATE PERFORMANCE AND MAKE ADJUSTMENTS

Conclusion

Budgeting is both a political and an administrative process. Budgets are tools to designate priorities for spending based on where revenues come from. There is no unanimity at the federal level on what programs and services should receive priority and further, how much of those programs and services should be delivered. Lobbyists, advocates, Congress, and the President all want a say in who gets what, as seen in the classic analogy of guns versus butter. Economic theory is an important driver for shaping budgets. Whether revenues are stimulated by government deficit spending or tax reductions has become a polarizing question in the public arena at the federal level. State and local governments are not as engaged in that discussion since they are on the receiving end of those policies as they are adopted and must maintain balanced budgets each year. Public administrators have tried to make budgeting a more rational and technical process. By examining annual budget increments to zeroing out annual budgets and starting each year newly, there are a variety of techniques to create a government budget. Ideally, the budget can be examined and justified by performance and efficiency of government spending (the bang for the buck) and by being attentive to what citizens and interest groups are asking for. While no budget technique is perfect, the federal government has adopted elements of performance budgeting and state finance organizations have recommended the same, albeit recommending a more entrepreneurial-styled budget approach.

References

Churchill, W. S. (1905). Why I am a free trader. In W. T. Stead (Ed.), Coming Men on Coming Questions (1). Retrieved from  https://babel.hathitrust.org/cgi/pt?id=uc2.ark:/13960/t5v69mw3z;view=1up;seq=7

Cozzetto, D. A., Kweit, M. G., & Kweit, R. W. (1995). Public Budgeting: Politics, institutions, and processes. White Plains, NY: Longman Publishers.

Continuing Appropriations Act, Pub.L 113-45;H.R (2014)

Domitrovic, B. (2014) (Ed.) The pillars of Reaganomics. San Francisco: Pacific Research Institute.

Government Finance Officers Association. (1998). Recommended budget practices: A framework for improved state and local government budgeting. Chicago, IL: National Advisory Council on State and Local Budgeting: Government Finance Officers Association. Retrieved at  http://www.gfoa.org/sites/default/files/RecommendedBudgetPractices.pdf

Government Performance and Results Act, Publ.L. 103-62 (1993)

Keynes, J.M. (1930). A treatise on money: In 2 volumes. New York: Macmillan & Company.

Lowery, A. & Shear, M. (2013, October, 18). Shutdown to cost U.S. billions, analysts say, while eroding confidence. The New York Times. Retrieved from  https://nyti.ms/2yfq5Rb  .

Schick, A. (2001). The changing role of the central budget office. OECD Journal on Budgeting 1(1),9-26.

Schick, A. (2002). Does budgeting have a future? OECD Journal on Budgeting 2(2),7-48.

Tucker, H. (1982). Incremental budgeting: myth or model? The Western Political Quarterly 35(3), 327-338.

Tyer, C., & Willand, J. (1997). Public Budgeting in America a twentieth-century retrospective. Journal of Public Budgeting, Accounting and Financial Management 9(2). Retrieved from  http://pracademics.com/attachments/article/1070/TYLER.pdf

Treasury Direct. (2017). The debt to the penny and who holds it. Retrieved from  https://www.tr easurydirect.gov/NP/debt/c urrent )

U.S. Department of Treasury. (2017). Debt limit. Retrieved from  https://www.treasury.gov/initiatives/pages/debtlimit.aspx