Fiscal Policy and Budgeting: Can this relationship be saved

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Fiscal Policy and Budgeting Can this
relationship be saved?

• You can only spend it once.
• Winter 2003

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Four Dimensions of Budgeting

• Accountability
• Managerial forecasting, productivity, efficiency
  and effectiveness
• Political instrument to allocate and redistribute
  resources
• Economic instrument

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Fiscal Policy and Budget

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

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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

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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 nations wealth to achieve publicly
  desired purposes.

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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
  payments
• Income but not service

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The Federal Dollar Where it Goes
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Where the Money Comes From

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

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The Federal Dollar Where it Comes From
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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

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Types of Taxes State/Local

• General property tax
• General sales tax
• Individual Income tax
• Corporation income
• Selective excises
• Motor fuel
• Cigarette
• Alcoholic beverages

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State and Local Government Revenues, FY 1996
Source Department of Commerce, Bureau of the
Census
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Budget as Fiscal Policy

• Budget influences the economy?
• What role does the deficit play?
• Is it inherently bad?

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Budget as Fiscal Policy Theory

• A government surplus slows economic growth by
  draining money from the economy.
• A government deficit pumps money into the economy
  and promotes economic growth.

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Budget as Fiscal Policy Theory

• Keynes a budget deficit could help reduce
  unemployment, while a surplus could cool
  inflation.
• 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 sluggish.

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Budget as Fiscal Policy Theory

• 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 collections.

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Budget as Fiscal Policy Theory

• 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 doubledand accumulated more debt that in
  the nations entire previous history.

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Budget as Fiscal Policy Theory

• Because of rosy scenarios from OMB, with David
  stockman
• cooking the books?

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Budget Deficits BillionsNational 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

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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 valuesand how do they get translated
  into governmental action?

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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

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Questions

• 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?

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Mandatory/Discretionary Spending

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

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Mandatory Spending

• Non-means-tested
• Everyone eligible receives assistance
• Social security, Medicare, Medicaid, federal
  military/civilian retirement, unemployment
  compensation
• Means-tested
• Those with limited income eligible
• Medicaid, food stamps, supplemental security
  income programs, Temporary Assistance for Needy
  Families

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Tax Expenditures

• Tax Expenditures tax revenues foregone because
  of policies that provide exemptions through the
  tax code.
• All tax filers receive a tax breakat least one
  deduction. The average tax break per filer is
  5,000 (NY Times, Nov. 20, 1994, E 5)

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Wildavskys Incrementalism as Strategy

• 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

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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 politics
• Senate interest group politics

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Games People Play

• Old Stuff disguise new programs as simple
  extensions of existing ones
• Foot-in-the-Door or the Camels 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.

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Ideal Budget

• Accurate
• Bottom line
• Shows expenses and revenues
• Comprehensive
• Consolidated no off-line items
• Comparable over time
• Shows history past year, current year, budget
  year
• Timely

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Features of Budget Formats
Primary Format
Characteristics Org. Feature
Orientation
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Line Item Budget

• Familiar
• Every item has a dollar value
• Simple, cheap to prepare, easy to read
• Parallels accounting system
• Purpose accountability

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Line Item Budget simple example

• Personnel
• Salaries 12,000,000
• Benefits 4,000,000
• Equipment
• Furniture 100,000
• Computers 50,000
• Supplies 15,000
• Training 20,000

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Line Item Budget

• Pros
• Good for control and accountability
• Simple to use and prepare
• Cons
• Doesnt tell what units are doing with its money
• Doesnt indicate levels of efficiency
• Doesnt address value

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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

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Performance Budget

• Pros
• Control costs
• Measure efficiency of activities
• Estimate future expenditures
• Cons
• Need to distinguished between fixed and variable
  costs
• Efficiency not the only needed measure is this a
  service the public wants?

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Performance Budget

• Suppress Fires
• Number of responses 100
• Cost per Response 60
• Annual cost 6,000
• Prevention
• Number of inspections 470
• Cost per inspection 4
• Annual cost 1,880

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Program Budgeting

• Background
• Popular in 1960s in Defense Department
• PPBS (Planning-Programming-Budgeting System)
• 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

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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

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Program Budget

• Public Safety
• Police
• Fire suppression
• Fire prevention
• Rescue
• Animal Control
• Street lighting

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Program Budgeting

• Pros
• Allows officials to
• evaluate goals,
• weigh alternative programs,
• choose policy strategies that best meet public
  purposes
• Some programs can be easily quantified
• Take decision making beyond efficiency

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Program Budgeting

• Cons
• No single methodology or tool to sort out
  alternatives
• Places heavy demands on officials
• Considerable time spent in gathering and
  analyzing information
• Some activities contribute to more than one
  public objective

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Zero-Base Budgeting

• Budgeting For Priorities
• Decision Units and Decision Packages
• Ranking Decision Packages

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Budgeting For Priorities

• Developed in 1969 for Texas Instruments
• Mandated by President Carter in 1970s
• 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

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Zero-Base Budgeting

• Pros
• 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

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Zero-Base Budgeting

• Cons
• Creates massive amounts of paper
• Undercuts the strategy of claiming all programs
  are equally crucial
• Managers must prioritize their programs

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New Performance Budgeting

• Focus on outcomes rather than outputs
• Redirection
• Reinventing Government
• Chief Financial Officers Act of 1990
• Government Performance Results Act of 1993

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New Performance Budgeting

• Principles
• Strategic planning
• Performance measures
• Flexible execution
• Reporting

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New Performance Budgeting

• Concerns
• Limited experience
• Does not address government-wide choice
  allowing for comparisons between agencies
• Difficult to agree on objectives
• Cost data not available
• Accountability
• Requires trust

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Real Life Discussion

• What questions would you ask of someone who comes
  to you with a budget request? (80-81)
• 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?

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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

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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?

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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.