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Government Budgeting Process

Government Budgeting Process. Role of budgeting process Allocate resources to most highly valued uses. The Federal Budgeting Process. Budgetary Reform in the 20th Century Budget and Accounting Act of 1921 Directly involved president Established Bureau of the Budget

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Government Budgeting Process

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

  2. 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)

  3. 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

  4. 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

  5. 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

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

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

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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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:

  20. 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

  21. 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

  22. 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

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

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