Finish the finance economic short essay with quailty work.
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Ch7.1.pptxGovernment Budgets
A budget is the blueprint for how government intends to achieve its objectives.
The budget process may impose restrictions on the outcome.
The process reflects the inherent economic difficulties of government budgeting.
Fiscal Results
Fiscal outcomes-actual revenue and spending and resulting surpluses or deficits-represent the economic structure by which subnational governments provide public services and influence the macroeconomy.
Fiscal Results
Using data from the BEA and the Census Bureau, three results stand out.
There is an aggregate state-local budget surplus in most years
The magnitude varies according to national economic conditions.
State and local fiscal outcomes have become more volatile over time.
Fiscal Results
The state-local surplus is sensitive to national economic conditions.
Historically, the state-local sector has provided a countercyclical element to national macroeconomic policy.
State-local government behavior during the last two recessions has been different.
Fiscal Results
The most recent recessions may be different because:
Of tax cuts and spending increases enacted during the 1990s.
New revenue streams are more cyclical
Tax increases in response to revenue drops were less than in prior recessions
Budget Schedules
State governments budget on either a one- or two-year cycle.
28 states adopt a budget annually
22 states adopt a budget biennially
In a typical biennial state the budget cycle begins in odd numbered years.
This is consistent with legislators who are elected in November of even numbered years.
Budget Schedules
All but 4 states have a fiscal year that starts on July 1.
Local governments typically follow their state.
Budget Schedule
A Representative Biennial Schedule
Oct-Dec 2018: Formulate budget for 2019 to 2021; prepare forecasts through June 2021.
Jan 2019: Governor presents FY 2019 to 2021 budget proposal.
Jan-Jun 2019: Legislature reviews and reworks budget proposal; forecasts updated; legislature adopts FY 2019-2021 budget; Governor signs the budget.
July 1, 2019 FY 2019 begins.
Budget Schedule
Jul 2019-Jun 2020: Expenditures and revenues monitored, with differences from budget estimates noted, corrective action considered if deficits appear.
June 30, 2020: FY 2019 ends.
July 1, 2020: FY 2020 begins.
Jul-Sep 2020: Expenditures and revenues for FY 2019 audited; final FY 2019 accounting prepared and presented.
Jan 2021: Governor presents budget proposal.
Budget Schedule
Once the legislature has passed a budget, the governor must decide whether to sign it or veto it.
44 governors have a line-item veto authority.
The legislature can decide to over-ride the governor’s veto.
Forecasting
The length and overlap of the budget process creates difficult forecasting problems.
A revenue and expenditure forecast is only as good as the underlying model and the economic forecast on which it depends.
Intergovernmental aid is also uncertain.
The deficit or surplus from one fiscal year is not known exactly until after the next fiscal year begins.
Forecasting
Sample Forecasting Model:
T1 = f(state income, state employment)
T2 = g(national income, state employment, price of gasoline)
Revenue = T1 + T2
These equations are determined and estimated using past tax collection and economic data.
To forecast revenue, a forecast of the economic variables is required.
Forecasting
There are two common technical reasons for errors in the tax forecast.
The model based on past experience may no longer be appropriate.
The accuracy of the tax forecast depends on the accuracy of the economic forecast.
Forecasting
Another difficulty is uncertainty about intergovernmental transfers.
The state may not know the amount or type of financial aid it will receive from the federal government in the fiscal year.
Local governments may have to guess about both federal and state aid.
Local governments are often formulating their budgets while the state is doing the same thing.
Forecasting
Yet another problem is that the actual deficit or surplus for a fiscal year is not known until after the new fiscal year begins.
Finally, political factors can affect the accuracy of forecasts.
