Government Budgeting Process

2. Government Budgeting Process • Role of budgeting process • Allocate resources to most highly valued uses

3. The Federal Budgeting Process • Budgetary Reform in the 20th Century • Budget and Accounting Act of 1921 • Directly involved president • Established Bureau of the Budget • Created General Accounting Office • In 1970 - Bureau of the Budget reorganized and named Office of Management and Budget (OMB)

4. The President’s Budget • OMB responsible for developing president’s budget • OMB solicits requests from federal agencies for funding • Sum of agencies requests will be unacceptably large • Requests can be viewed as menu of choices for those determining budget • Political and economic document

5. The Congressional Budget • Congressional Budget Office (CBO) • assists Congress in evaluating president’s budget • submits report to congressional budget committees • Budget resolutions presented to both houses of Congress • House Ways and Means Committee and Senate Finance Committee hold hearings on specific appropriations • Further budget resolutions

6. The Congressional Budget • Congress does not always follow schedule • Budget resolution late or not passed in some years • Results in continuing resolution rather than final budget

7. Incrementalism • Theory of budget determination • Suggests budgets of government agencies will be incrementally larger than the previous year

8. Effects of Special Interests • Special interests important element in budgetary process • Political pressure works toward expansion of existing programs

9. Incrementalism and Efficiency • Incrementalism logical within special interest theory framework • Also logical because of complexity of government spending • Incrementalism as a rational economic policy

10. Politics and Federal Budget • Changes in politics of budgetary process caused by • Changes in composition of federal spending toward social services • Increasing deficits • A drift away from incrementalism as president and Congress attempt to change budget in more radical ways

11. Entitlements • Provide funds to individuals meeting eligibility requirements • Once in effect, level of expenditures depends on external conditions • No fixed budget - expenditures relatively hard to control • Add to uncertainty of budgetary process • Difficult to eliminate

12. Off-Budget Expenditures • Government-owned corporations with budgets separate from government’s budget • U.S. Postal Service • Amtrak • Increased dramatically beginning in 1950’s • Activities sometimes placed off-budget to reduce scrutiny

13. Program Budgets Versus Line Item Budgets • Program budget - groups expenditures by program goals • Enumerates objectives sought • Line item budget - groups expenditures by types of items purchase • Enumerates items purchased • Program budgets best evaluate effectiveness of government expenditures

14. Planning-Programming-Budgeting System (PPBS) • Government expenditures grouped by objective • Facilitates undertaking of cost-benefit analyses of programs • Define objectives, consider alternatives, undertake cost-benefit analyses • Most useful when considering whether a new program should be implemented

15. Cost-Benefit Analysis • Intended to compare costs/benefits of a program • Requires costs/benefits be estimated and weighed

16. Steps of Cost-Benefit Analysis • Enumerate the options • Enumerate the costs and benefits • Avoid double counting • Concentrate on primary effects • Convert costs/benefits to dollar terms

17. Cost-Benefit Analysis as Decision-Making Tool • Results of cost-benefit study can be used as guideline as to whether program should be initiated • Favorable benefit-to-cost ratio may not imply that program should be undertaken • Unfavorable benefit-to-cost ratio may not imply that program should not be undertaken

18. Cost-Benefit Analysis and Public Interest • Cost-benefit analysis is utilitarian • Dollar costs weighed against dollar benefits • Cost-benefit analysis should be used as a guide to final decision • Determination of public interest is normative

19. Discount Rate • Affects cost-benefit analysis • Rate of interest at which future costs/benefits discounted to compute present value • Selecting appropriate rate important when benefits extend into the future

20. Present Value Measurement of Costs and Benefits • Present value of benefit to be received one year from now: • PV = B1/(1+r) • Present value of benefit to be received two years from now: • PV = B1/(1+r) + B2/[(1+r)(1+r)] • General Formula:

21. Choosing the Right Discount Rate • Effects estimate of present value of project • More important the longer the time horizon • Options of choosing discount rate: • Apply rate on government bonds of same maturity as project • Use private market interest rate • Should be a risk-free rate

22. Choosing the Right Discount Rate • Problems when choosing discount rates • Inflation • Discount rate should account for opportunity costs of forgone tax revenues to the government

23. Average and Marginal Benefits • Optimal project produces highest net benefits • Ratio of benefits to costs – ratio of average benefits to average costs • Optimal output equates marginal costs with marginal benefits • Limitations of cost-benefit analysis • Difficult to measure costs/benefits • Does not provide sufficient information

24. Taxing and Spending • Differences between how political decisions on spending and revenue generation are made • Spending more susceptible to special interest activity than taxes