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									Fiscal Policy and Budgeting:
Can this relationship be
―You can only spend it once.‖

Winter 2003

               Budget Overview   1
Four Dimensions of Budgeting
1. Accountability
2. Managerial: forecasting,
   productivity, efficiency and
3. Political instrument to allocate and
   redistribute resources
4. Economic instrument

               Budget Overview        2
Fiscal Policy and Budget
  Budgeting: plan to carry out policy objectives
    Expenditures: who gets what for how
    Revenues: who pays how much by which
  Fiscal Policy: the impact of federal
  government expenditures and revenues on
  the economy.
    Managing the economy

                   Budget Overview             3
What is a Budget?
  A plan for how the government
  spends our money
     Needs, priorities, estimates

  A plan for how the government
  will pay for its activities
     Estimates and impacts

                 Budget Overview     4
Enduring Issue
  Budgeting is a political process occurring in
  a political arena for political advantage
    versus:

  Budgeting as a rational means to provide
  for the efficient, effective, and equitable
  distribution of the nation’s wealth to
  achieve publicly desired purposes.

                  Budget Overview               5
Government Expenditures
  Two categories:
     Government purchases
       Government employee wages
       Purchases of goods/services from private sector
       Represents government contribution to GDP
     Transfer payments
       Social security, Medicaid payments, retirement
       Income but not service

                     Budget Overview                 6
The Federal Dollar – Where it Goes
Where the Money Comes

 Individual income taxes
 Social insurance payroll taxes
 Corporate income taxes
 Excise taxes
 User fees

               Budget Overview    8
The Federal Dollar – Where it Comes From
Where the Money Goes
 Social Security – 23%
 Medicare – 12%
 Medicaid – 7%
 Means tested entitlements – 6%
 Federal insurance programs – 6%
 National Defense – 16%
 Non-Defense – 19%
 Interest Payments – 11%
               Budget Overview     10
Types of Taxes – State/Local
  General property tax
  General sales tax
  Individual Income tax
  Corporation income
  Selective excises:
     Motor fuel
     Cigarette
     Alcoholic beverages

                   Budget Overview   11
  State and Local Government Revenues,
  FY 1996                   Property taxes

                                17%             Sales and gross
                                                receipts taxes
                                                income taxes

                                         20%    Corporation net
                                                income taxes

                                                Revenue from
  19%                                           Federal
                              12%               Government
                  3%                            All Other

Source: Department of Commerce, Bureau of the
Budget as Fiscal Policy
  Budget: influences the economy?
  What role does the deficit play?
     Is it inherently bad?

                    Budget Overview   13
Budget as Fiscal Policy:
   A government surplus slows economic
  growth by draining money from the
  A government deficit pumps money into
  the economy and promotes economic

               Budget Overview       14
Budget as Fiscal Policy:
   Keynes: a budget deficit could help reduce
  unemployment, while a surplus could cool
  In good times, the govt. ought to run a
  surplus to keep the economy from expanding
  too quickly.
   In bad times, the govt. ought to run a deficit
  to keep the economy from becoming too

                   Budget Overview             15
Budget as Fiscal Policy:
 Supply-side economics: contended that
  the govt. could increase both its
  revenues and the economies’ growth by
  cutting takes. The assumption was that
  the lower level of taxes, the more
  money companies could invest and
  consumers could spend. The resulting
  economic growth would increase tax
               Budget Overview        16
Budget as Fiscal Policy:
 Reagan and Congress in 1981 cut taxes by
  25% and virtually eliminated the corporate
  income tax.
      The results: the federal deficit rose from $50
       billion in FY 80 to $220.7 billion by 1986;
      During the Reagan years, the national debt more
       than doubled—and accumulated more debt that in
       the nation’s entire previous history.

                       Budget Overview                  17
Budget as Fiscal Policy:
  Because of ―rosy scenarios‖ from OMB,
  with David stockman
 ―cooking the books?‖

               Budget Overview        18
Budget Deficits: $Billions
National Debt: $6.5 billion
Year      1960 1970 1980 1985 1990
Dollars   0    -28.8 -73.8 -213 -221

Year     1994       1996 2000    2003
Dollars -258        0   +100     -199*
* Does not include war

               Budget Overview      19
The Budget Process
  It is a political decision-making
  process, making political choices
  about the values. Who will receive
  government benefits?
     What actions does society think are
      needed, what are our values—and how do
      they get translated into governmental

                  Budget Overview         20
Executive Preparation Phase
  18 months before start of the fiscal year
  General budget/policy guidelines
     Economic guidelines
     Program objectives
     Expenditure ceilings
     Budget baseline
  Final document due to Congress: 1st Monday
  in February

                      Budget Overview         21
Time            Current Budget       FY 04               FY 05
                    FY 03

Oct. 1, 2002    Should be            OMB reviews
                Enacted by Oct.      Agency requests
                1, 2002:
                1st quarter
Dec. 1                               OMB passback

Dec. 25                              Agency Resubmits

Jan. 25, 2003   2nd quarter           State of the
                apportionment         Union: President
                                      submits FY 04
                                      budget to
Jan.CApril      3rd quarter           House Budget       OMB sets budget
                apportionment         Committee: Sets    ceilings; Agencies
                            Budget Overview              budget call for
                                                         FY 05
May B June                      House             Agencies
                                Appropriations:   prepare
                                Hearings          budgets:
                                                  submit to HQ

Summer        4th quarter       Senate:           Office of
              apportionment     Appropriations    Secretaries
                                                  review budget

September .   Close out books   13 Budget         Agencies
              for FY 03         Bills: Voted      submit FY 05
                                                  budget to OMB

October 1,                      FY 04 fiscal
2003                            year begins

                         Budget Overview                          23
  Should the budget be balanced?
  Why is it hard to cut the budget?
  What is the role of public administration
  in making budgets, cutting budgets,
  and deficits?

                 Budget Overview         24
  Mandatory: Must spend
     Debt: interest payments
     Entitlement programs, such as social security,
      retirement, VA benefits, Medicaid: based on
      eligibility rules.
     Outlays can’t be increased/decreased without
      change in substantive law
  Discretionary: More choice in making cuts
     Everything else:
     Signifies form of spending, not priorities

                       Budget Overview                 25
Mandatory Spending
     Everyone eligible receives assistance
     Social security, Medicare, Medicaid, federal
      military/civilian retirement, unemployment
     Those with limited income eligible
     Medicaid, food stamps, supplemental security
      income programs, Temporary Assistance for
      Needy Families

                      Budget Overview                26
Tax Expenditures
  Tax Expenditures: tax revenues
  foregone because of policies that
  provide exemptions through the tax
  All tax filers receive a tax break—at
  least one deduction. The average tax
     break per filer is $5,000   (NY Times, Nov. 20,
  1994, E 5)

               Budget Overview                         27
Wildavsky’s Incrementalism as
  Budgets are based on past history.
  Decisions are based on the margin:
  how much of an increase
  Guided by the notion of ―fair share‖.
  It preserves the ―consensus‖
  Reduces the burden of information
  Reduces uncertainty

                Budget Overview           28
Roles: Situational
   Agencies: advocates
   Dept. budget office: guardians/advocates
  OMB: guardians/advocates
  President: advocate of his budget
  House Ways and Means: guardians
     House proposes
  Budget committees, appropriations,
  authorizing committees: interest group
  Senate: interest group politics
                       Budget Overview        29
Games People Play
  Old Stuff: disguise new programs as simple
  extensions of existing ones
  Foot-in-the-Door or the Camel’s nose:
  propose only a small amount
  Pays for Itself: at some distant time maybe.
  They Made Us Do It: increases due to
  external mandates
  The Washington Monument syndrome:
  propose cuts to most popular program
  Chroming: form over substance: dazzle
  them.             Budget Overview          30
Ideal Budget
  Bottom line
  Shows expenses and revenues
  Consolidated: no off-line items
  Comparable over time
  Shows history: past year, current year,
  budget year
                Budget Overview        31
Features of Budget Formats
  Format       Characteristics         Org. Feature       Orientation

 Line Item     Expenditure by          Resources          Control
               commodity or            purchased
               resource purchased

 Performance   Expenditure by          Tasks,             Management
               workload or activity.   activities, or
               Presentation of unit    direct output
               cost by activity        performed
 Program       Expenditure related       Achievements,    Planning
               to public goals. Cost     final product,
               data cross                outcome, or
               organization lines        consumer
                          Budget Overview
                                         output                      32
Line Item Budget
  Every item has a dollar value
  Simple, cheap to prepare, easy to
  Parallels accounting system
  Purpose: accountability

              Budget Overview         33
Line Item Budget:
    simple example
     Salaries           12,000,000
     Benefits            4,000,000
     Furniture          100,000
     Computers          50,000
  Supplies               15,000
  Training               20,000

                  Budget Overview     34
Line Item Budget
     Good for control and accountability
     Simple to use and prepare
     Doesn’t tell what units are doing with its money
     Doesn’t indicate levels of efficiency
     Doesn’t address value

                       Budget Overview                   35
Performance Budgeting

 Links costs to activities
 Identifies specific outputs to be
 produced by activities/services
 Sets targets for achievement
 Makes budget requests based upon
 these projected performance targets

               Budget Overview         36
Performance Budget
     Control costs
     Measure efficiency of activities
     Estimate future expenditures
     Need to distinguished between fixed and variable
     Efficiency not the only needed measure; is this a
      service the public wants?

                       Budget Overview               37
Performance Budget
  Suppress Fires
     Number of responses               100
     Cost per Response                  $60
       Annual cost                     $6,000
     Number of inspections 470
     Cost per inspection    $4
       Annual cost                     $1,880

                      Budget Overview            38
Program Budgeting
     Popular in 1960’s in Defense Department
        PPBS (Planning-Programming-Budgeting
     Extended to all Executive agencies in 1965
        Met great resistance
        Suspended in 1971
     Logics and techniques in routines of
      budgeting at all levels of government

                      Budget Overview           39
Program Budget
  Organized by program
  Broad terms of mission and goals
  Develops means to achieve goals:
  sub-goals, objectives
  Uses inputs, outputs and impacts
  Pure Program Budgets Cut Across
  Organizational Lines
     Must create ―crosswalks‖ that translate program
      data into department operating budgets

                      Budget Overview                   40
Program Budget
  Public Safety
     Police
     Fire suppression
     Fire prevention
     Rescue
     Animal Control
     Street lighting

                    Budget Overview   41
Program Budgeting
     Allows officials to:
        evaluate goals,
        weigh alternative programs,
        choose policy strategies that best meet public
     Some programs can be easily quantified
     Take decision making beyond efficiency

                      Budget Overview                 42
Program Budgeting
     No single methodology or tool to sort out
     Places heavy demands on officials
     Considerable time spent in gathering and
      analyzing information
     Some activities contribute to more than
      one public objective

                    Budget Overview               43
Zero-Base Budgeting

  Budgeting For Priorities
  Decision Units and Decision Packages
  Ranking Decision Packages

                Budget Overview          44
Budgeting For Priorities
 Developed in 1969 for Texas Instruments
 Mandated by President Carter in 1970’s
 Dropped by Reagan Administration
 Used by some federal agencies in preparing
 budget requests
 Used by many state and local governments
 Does not require a ―zero‖ start
 Focus is on ranking & comparing alternatives

                  Budget Overview           45
Zero-Base Budgeting

     Will develop operating data for managers
     Should induce consideration of other
      service delivery methods
     Once funding established – a line can be
      drawn under the cumulative line
     Establishes un-funded priorities

                   Budget Overview           46
Zero-Base Budgeting
   Creates massive amounts of paper
   Undercuts the strategy of claiming all

    programs are equally crucial
   Managers must prioritize their


                Budget Overview         47
New Performance Budgeting
  Focus on outcomes rather than outputs
     Reinventing Government
     Chief Financial Officer’s Act of 1990
     Government Performance & Results Act of

                   Budget Overview          48
New Performance Budgeting
   Strategic planning
   Performance measures

   Flexible execution

   Reporting

                Budget Overview   49
New Performance Budgeting
     Limited experience
     Does not address government-wide choice
      – allowing for comparisons between
     Difficult to agree on objectives
     Cost data not available
     Accountability
       Requires trust

                     Budget Overview       50
Real Life: Discussion
  What questions would you ask of someone
  who comes to you with a budget request? (80-

  What questions would you ask of someone
  who proposals organizational cutbacks? (105-107)
  Who makes the budget decisions in your
  agency? Who are the players? What are the
  formal rules? What are the informal rules?

                    Budget Overview              51
Budget Reform Proposals
  Enact a balanced budget
  constitutional amendment.
  Create a biennial or multi-year budget
  Give president the line-item veto
  Create a capital budget
  Performance-based budgeting
  “Big bucket budgeting”
               Budget Overview        52
Budget Reform
 Can the budget process be removed
 from politics? Should it be?
 Why do we have a deficit?
 Is it a political problem or a
 managerial problem?

             Budget Overview         53
Budget Reform
  Management reforms : can management
  reforms reduce the deficit?
  Rational approaches:
     zero-based budgeting
     planning and programming budgeting
     management by objectives
     now GPRA: strategic plans, results orientation
      tied to budget.

                     Budget Overview               54

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