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The Logic of the Budget Process

The Logic of the Budget Process. A Budget is a Spending PLAN. The Size and Growth of Government Expenditure. Government purchases (stuff) Transfer payments (Social Security) Government spending (all governments) is about a third of the GDP Not too bad compared with other countries.

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The Logic of the Budget Process

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  1. The Logic of the Budget Process

  2. A Budget is a Spending PLAN

  3. The Size and Growth of Government Expenditure • Government purchases (stuff) • Transfer payments (Social Security) • Government spending (all governments) is about a third of the GDP • Not too bad compared with other countries

  4. Budget Process & Logic • Different from the private sector • No price or profit signals to go by • Public goods are difficult to sell • No profits/bottom line to measure • Limited by resource constraints • More customers is not necessarily better • Mixed, sometimes competing motives

  5. The Parts of the Public Expenditure/Public Revenue Process • Who should pay for things? • How much should be borrowed? • The budget: • Elaborates executive-branch intentions • Provides for legislative review and approval • Provides control of implementation

  6. Multiple Budgets • The budget year • The plan for the next budget year • The progress-report year • Current budget in execution • The final report year • The most recently fully-completed budget • Outyears • Future budgets beyond the one being requested

  7. Fiscal Year • Pronounced “FISS-KUL” (NOT physical) • Federal FY runs from 1 Oct thru 30 Sep • Some states and cities different • Named by the year in which the FY ENDS (FY 2009 goes from Oct 2008-Sep 2009)

  8. Functions of the Budget Process • Fiscal discipline and control • Response to strategic priorities • Efficient implementation of the budget

  9. 4 Phases of the Budget Cycle • Executive Preparation • Agency requests, ceilings, forecasts, justification, strategy, promises • Legislative Consideration • Subcommittees, appropriations, bi-cameral approval, conference, veto • Execution • Appropriations spent, services delivered, spend-down, carry-over, budget base • Audit and Evaluation • GAO, financial or performance audits

  10. Authorization v Appropriation • Authorization - what the executive is allowed to spend • Appropriation – what the executive is actually given to spend

  11. Governmental Accounting & Financial Reporting • Standards • Financial Accounting Standards Board (FASB-private) • Government Accounting Standards Board (GASB-govt)

  12. Governmental Accounting & Financial Reporting • Elements of an accounting system • Source documents • Receipts, invoices • Journals • Chronological summary of transactions • Ledgers • Reports of revenue, expense, or balance in an account • Procedures & controls • Forms, instructions, policies

  13. Governmental Accounting & Financial Reporting • Funds • Governmental Funds • General fund (e.g., treasury) • Special revenue funds (e.g., transportation trust fund) • Debt service funds (e.g., bond repayment) • Capital projects funds (e.g., new tunnel) • Permanent fund (e.g. a trust fund) • Proprietary Funds • Enterprise fund (e.g., water, utilities) • Internal service fund (e.g., motor vehicle maintenance, GSA) • Fiduciary Funds (e.g., pension funds)

  14. Governmental Accounting & Financial Reporting • Accounting basis (the method of matching revenues and expenditures over time) • CASH BASIS • Records money inflow when received, expenditure when cash payment completed • FULL ACCRUAL BASIS • Revenue recorded when earned, expenses recorded when liability incurred • MODIFIED ACCRUAL • Expenditure recorded when liability incurred, revenue recorded when cash received

  15. Governmental Accounting & Financial Reporting • Comprehensive Annual Report (CAFR) • Introductory section, financial section, statistical section

  16. Budgets & Political Strategies • The Incremental Insight (reality) • Importance of the budget base • Politics and compromise • The Comprehensive Insight (abstract) • Bottom up review, annual analysis

  17. Roles, Visions, and Incentives • Operating agency’s view • Chief executive’s view • Legislature’s view

  18. Strategies • Strategies for a proposed reduction in the base • Propose a study • Cut popular programs • Dire consequences • All or nothing • You pick • We are the experts

  19. Strategies • Strategies to continue an existing program • Round up • “if it don’t run, chrome it” • Sprinkling • Numbers game • Workload and backlog • The accounting trap

  20. Strategies • Strategies to propose a new program • Old stuff • Foot-in-the-door financing • It pays for itself • Spend to save • Crisis • Mislabeling • What they did makes us do it • Mandates • Matching the competition • It’s so small

  21. Politics, Representation, and Government Finance • Some people are more politically important than others • Specialists appear • Imperfect information results in bribery • Voters make uninformed choices

  22. Conclusion • Budgets are reality…everything else is just talk! • Budgets allocate public resources • Four phases of the budget cycle (executive preparation, legislative, execution, audit and evaluation • Political and incremental

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