Chapter Eight: Government Budgeting Public Administration in America 11e Michael E. Milakovich and George J. Gordon 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 Government expenditures 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 Budget deficit 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 Preparation Authorization Appropriation Execution 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 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 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