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					Chapter 11: Budgeting
         Defining Budgeting
• Budget decisions shape government
• Budgeting: fundamental social decisions
  about the use of scarce resources.
• Balance of financial power shifts between
  national and subnational, legislature and
• Key: determining how to decide budget
  Economic Role of the Budget
• Federal budget shapes national economy
• Fiscal policy: government taxation and
  – Since the 1930s, economists and government
    recognize that fiscal policy affects the
  Economic Role of the Budget
• Compensatory economics: preached by
  Franklin D. Roosevelt’s New Deal; the
  government can and therefore should use
  the budget to steer the economy.
          Economic Terms
• Fiscal year: any given budget year
• Surplus: more revenues than
  expenditures in any given budget year;
  slows economic growth by draining money
  from the economy
• Deficit: expenditures exceeding revenues
  within a fiscal year; pumps money into the
  economy and promotes economic growth
  Economic Terms (continued)
• Debt: deficit accumulated over time
  constitutes national debt
• Monetary policy: the Federal Reserve’s
  management of the money supply
• Stagflation: stagnant growth and inflation
  Economy Shapes the Budget
• National economy shapes the federal
• Budget making depends critically on
  estimating the likely levels of economic
  growth, unemployment, inflation, and
  interest rates.
• Preparing the budget depends first on
  forecasting economic performance.
    Political Role of the Budget
• Budget embodies fundamental political choices:
   – Values: which programs get funded and which do not
   – Institutions: relative sway of the executive and
     legislative branches
• Congress responsible for the budget until the
  end of World War I
• Budget and Accounting Act of 1921:
  revolutionized federal budgeting; for the first
  time the president was to submit an annual
  budget to Congress
    Top-Down Budget Making
• Preparation of the budget is the first step
  in the budgetary process.
• Top-down budget approach: each
  government’s executive sets broad targets
  for overall spending and revenues.
• Spending targets fix a ceiling under which
  the agencies are expected to stay in
  preparing their individual budget requests.
    Bottom-Up Budget Making
• Central theory of bottom-up budget
  making is incrementalism.
• Incrementalism (Aaron Wildavsky):
  officials do, and should, ask for a fair-
  share increment over the agency’s base;
  these increments reflect the agency’s
  share of changes in the budgetary pie.
   Bottom-Up Budget Making
• Incrementalism assumes
  – No one really considers the whole budget
  – Political battles focus on the size of the
    agency’s increment
  – Political battles focus on the increment’s size
    compared with those received by other
Attempts to Reform Incrementalism
• Management by objectives (MBO): Nixon
  administration; Office of Management and
  Budget implemented this strategy to strengthen
  the ability of managers to manage; emphasized
• Zero-base budgeting (ZBB): Carter
  administration; budgeters began from a certain
  level of spending, assembled decision
  packages, and ranked them.
        Attempts to Reform
    Incrementalism (continued)
• George H. W. Bush administration implemented
  a flexible freeze, in which increases in some
  programs would be balanced by decreases in
• Performance Assessment Rating Tool
  (PART): George W. Bush administration; sought
  to integrate measures of agency performance
  with budgetary decisions.
  Uncontrollable Expenditures
• Uncontrollable expenditures: portion of
  the budget that has become uncontrollable
• Share of the federal budget that can be
  changed in any given year fell from 66
  percent in 1965 to 38 percent in 2003
            Budget Games
• Budget submitted by the president is a set
  of recommendations.
• Congress authorizes expenditures and
  determines how revenues shall be
   Budget Games (continued)
• Rule of anticipated reactions: president
  and agencies adapt their estimates and
  recommendations to fit their perceptions of
  how Congress will react to them.
• Washington Monument ploy: agencies
  offer to cut their most popular programs in
  the full knowledge that legislators would
  never allow such cuts to take effect.
  – e.g., The National Park Service would never
    close the Washington Monument.
    Budgeting Case: Southeast
Pennsylvania Transportation Authority
     (SEPTA) Budget Games

• How has SEPTA emulated the
  Washington Monument ploy?
• What are the benefits and weaknesses of
  this game-playing?
• How would you fix this problem?
      Budget Appropriations
• Congress responsible for this
  appropriations process:
  – Authorizations: create programs and put
    limits on how much money they can spend
  – Appropriations: commit money for spending
    Congressional Budget Act
Congressional Budget Act of 1974:
• Gave Congress more time to work on the
  budget by pushing the start of the fiscal
  year forward from July 1 to October 1
• Created new committees in each house
  and created a new process
             Budget Process
• Congress sets budget totals.
  – Legislative budget: for the first time, Congress
    would prepare an estimate of total expenditures,
    revenues, and the deficit.
• Congress authorizes the programs and
  appropriates the money.
  – Budget authority: appropriations committees in each
    house decide how much money should be spent.
• Outlays: money expected to be actually spent.
        More Budget Terms
• Black budget: Defense Department’s
  secret projects; only a handful of members
  of projects know about their size and scale
• Earmarks: pork-barrel spending projects
• Continuing resolutions: combines all the
  government’s spending decisions into one
  huge package; when Congress cannot
  complete work on time
    Budget Process Reforms
• Many potential reforms have been
  – Create a biennial budget.
  – Create a capital budget: for capital
    investments, such as highways and bridges,
    whose benefits stem far into the future.
  – Give the president a line-item veto: new veto
    power over individual line items in the budget.
  – Enact a balanced-budget constitutional
          Budget Execution
• Executive is overseer of the execution
• Congress tries to restrain executive
  discretion through legislative controls.
• Congress limited executive impoundment
  through Impoundment Control Act of 1971.
  – Impound: refusal by the president to spend
    money appropriated by Congress; practiced
    excessively by Nixon.
 Budget Execution (continued)
• Impoundment Control Act distinguishes
  – Rescissions: permanent suspension of
  – Deferrals: temporary suspension of outlays
       Management Control
• Follow the flow of money.
• Money trail demonstrates who is doing
• By controlling the flow of money, the
  executive can control the direction and
  pace of government activity.
• The flow of money is important for
  reporting and evaluating an agency’s
Budgeting for State & Local Gov
• Vast array of strategies but several
  common features:
  – State and local governments must balance
    their budgets (cannot print money or engage
    in long-term borrowing like the federal
    government can)
  – Have two distinct budgets: an operating
    budget and a capital budget
  – Operations shut down if a new budget is not
    passed by the start of the new fiscal year
• Budgeting is the arena that most
  fundamentally shapes policy decisions
• Decisions that are formalized at one stage
  of the process might be reformulated at
  later stages due to budgetary concerns

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