An Overview

of Public
Budgeting
CHAPTER 6 BY GREENE

ELISA M. ESPADA
 OUTLINE

01 02 03 04 05
Definition of Different A Short The Budget An Overview
Public ways to think History of Cycle of Federal
Budgeting about American Budgetary
Budgeting Budgeting Process
- 1st phase
Preparation and
Policy Formulation
- way to manage the
economy - 2nd phase
- way to choose among Legislative Review
competing alternative - 3rd phase
priorities
- way to produce the right
Executed
mix of programs to balance (implemented)
the needs of the public and - 4th phase Auditing
private sectors so our
economy is productive and
and Evaluation
individuals are provided for
- way to review and control
the agencies of the
government
- is a form of accounting
 OUTLINE

06 07 08 09 10
Types of Taxation, Tax Equity Major Types Fiscal Policy,
Budgets Revenues, and Tax of Taxes Monetary
and Expenditures Policy, and
Expenditures Public
- Line-item Budgets Budgeting
and Incrementation
- Performance
Budgeting: Planning-
Programming- - Four primary policy
Budgeting Systems goals of Fiscal Policy
(PPBS)
- Zero-Based Budgets 1. Full employment
(ZBB) 2. Price Stability
- Capital Budgets 3. Constant Economic
Growth
4. Public goods
(collective goods)
 What is Public
budgeting?

- One of the most critical aspects of public administration

- Is a highly political process where public policy comes to life

- Is much more than accountants sitting around making entries into the books or working with spreadsheets on computers

- In theory, it involves collecting money from everyone and using it to pay for the services needed by the society
HOW DO WE
DEFINE A PUBLIC
BUDGET?
Is a document or a plan for how the
government will spend the public’s money
(expenditures) and how it will generate the
funds (revenues) to pay for the services next
year
WHAT DO WE
MEAN BY
BUDGETING?
Is more than just a document but a written
record of public policy
Is something that everyone must do, whether
we formally construct a budget on paper, use
popular accounting software or just roughly
construct a budget in our minds
 1. BUDGETING IS A WAY TO MANAGE THE
ECONOMY
Three important goals on the major objectives of budget
policy:

1. Allocation of resources (deciding on what will

be allocated)

2. Distribution of resources (redistribution of wealth

and equity concerns)

DIFFERENT WAYS 3. Stabilization of economy (efforts to ensure that

the budget policy promotes economic growth

TO THINK ABOUT while controlling inflation and unemployment)

BUDGETING
2. BUDGETING IS
ALSO A WAY TO - Is where ideological clashes occur over
CHOOSE AMONG what is important and what will be
COMPETING secondary in public policy

ALTERNATIVE
PRIORITIES - Is a power struggle among competing
priorities and interests

- This includes the agencies of government

that must lobby to ensure that their funding
continues and to keep their program afloat
3. BUDGETING IS ALSO A WAY TO PRODUCE
THE RIGHT MIX OF PROGRAMS TO BALANCE
THE NEEDS OF THE PUBLIC AND PRIVATE
SECTORS SO OUR ECONOMY IS PRODUCTIVE
AND INDIVIDUALS ARE PROVIDED FOR

- The government tends to provide most of the nations

physical infrastructure and other services but there are still
homeless, hungry people living in poverty
4. BUDGETING IS
- The greatest power of congress is the
“power of the purse” wherein agencies

A WAY TO REVIEW depend on the funding from the

legislature to function and hold them

AND CONTROL accountable for poor performance

THE AGENCIES OF - Both the legislative and the executive

GOVERNMENT
The budget is a financial plan that
includes categories of expenditures
that are used to carry out activities
and implement public policy
branches of government review the
behavior and the performance of public
agencies
- Budgeting is a form of control and a tool
of management
5. BUDGETING IS A FORM OF ACCOUNTING

- It serves as a public - Accounting is a system of - The general budget of the

statement of government
activity in which the
activities of government are
documented by a complex
system of governmental
accounting
recording, classifying, and
reporting financial
transactions in an orderly
way
nation, states, and local
government are based on
the proposed budgets of
every Bureau, department,
and agency in the
jurisdiction
A SHORT HISTORY OF
AMERICAN BUDGETING
-Public budgeting is a fairly recent development in the US

-While public budgets existed much in Europe but they were

absent during colonial America

-The Treasury Act in 1789 established the Treasury

Department with Alexander Hamilton as the first secretary

-he argued that it was important to pay colonial debt to

ensure that the new nation remain creditable with other
nations in Europe

-In 1917 when the former Soviet Union was formed, they
refused to pay off the debt to Czar’s government thereby
ruined its credit rating and forced to pay hard currency
(gold)

-Budget preparation was simple during early days just as

collecting and submitting estimates via The Book of
Estimates
-Federal government was small, weak, and limited in its
ability to generate revenue.

-Congress took control of the process and followed a line-

item budgeting

- For a century, the federal budget was a legislative-

dominated function

-Budget reform begins at the local level due to the

escalating cost of the government that were attributed to
economic conditions and the waste, graft, and corruption,
and political machines

-By the 20th century, there was a demand for more

centralized and efficient budgeting

-Several types of reformers sought to clean up the city

and state governments and were responsible for making
better systems of accounting and control
-Reformers believe that it took much more than honest
people to make government work and they were
responsible for creating and implementing cost
accounting, uniform reporting systems. Centralization,
and accrual accounting in which revenues are matched to
expenditures during an accounting period to enable more
meaningful evaluation

-In 1907 a model on making a municipal budget was used

-In 1929 all states have a central budget office

-Most reform budgets were line-item budgets

-Taft commission study the economy and efficiency in

government

-1921 Congress passed the Budget and Accounting Act

-Created the Bureau of Budget (BOB) and Government

Accounting Office (GAO)
-In 1939 the BOB was moved to the Executive Office of the
President based on the recommendation of the Brownlow
Committee’s report to reorganized the executive branch
and became to Office of Management and Budget (OMB)

-Between 1921 and 1974 the trend was toward increasing

executive control over the budgetary process, thus the
shift of control was from legislative to the executive but
with approval of the legislative

-In 1974 the Congress took back some of the control with
the Budget Impoundment Act since then the budget has
remained under executive control but Congress has
maintained an active role by creating the Congressional
Budget Office (CBO)

-The period from 1974 – 1990s has been called the era of
stalemate
WHAT IS THE
BUDGET CYCLE?
- Is the process in which the
budget is planned, prepared,
debated, adopted,
implemented, and audited.

- It usually contains several

distinct but overlapping phases

- Includes preparation and

formulation, legislative review,
budget execution, and audit
and evaluation phases
 Formulation phase
-Months of work involves planning and
analysis
-Gather all the agencies expenditures
estimates and policy recommendations
-Prepare economic projections
-After review, the president sets the
budget and fiscal policy guidelines for
the next fiscal year
-Incremental budgeting is the used as
the basis for the budget next year

FEDERAL BUDGETARY PROCESS: AN OVERVIEW

- Federal process has four major phases
namely; formulation, legislative review,
budget execution and audit 05
Two types of Legislative
budget spending:
Review
1.Mandatory – includes all the spending
that is made pursuant to laws and other
-There is a budgetary timetable
appropriation laws

-Continuing resolutions – allows the

2.Discretionary – refers to those
government to operate while the budget
programs that are subject annual funding
is still work-out and the old budgets are
decisions in the appropriation process
extended until the new budget is passed
Period prior to fiscal year Fiscal year, Oct 1-Sept 30 Beyond
fiscal year

March January October 1 September 30

Formulation
of president's
budget

Congressional budget
Preparation process, including
and policy appropriations; usually
formulation begins 9 months before
fiscal year begins

Legislative Execution of
review approved Budget

Audit and
Budget evaluation
execution
Audit
Budget Execution

-Budget authority and resources available to the executive branch by

means of appropriation system

-Ensures an efficient and effective way to distribute funds and

minimizes additional request for supplemental funds

-During this phase, administrators try to achieve programs goals

within the constraints of the appropriated funding, but there never
seems to be enough money to attain goals

-The budget is a finite financial pie, and each agency must operate
within these limitations once the budget is executed

-Agencies must plan, manage and account for their budgets while at
the same time implementing whatever public policies they have
been mandated to administer
Auditing Evaluation
-Also involves in federal budgetary process
- Is simply verifying that all the accounting
which examines efficiency and
and other procedures were properly
effectiveness of government programs
followed but auditing can also uncover

problems such as fraud, embezzlement and

-Some of the evaluations have disclosed
others
that very little of the appropriate money

-Agencies are responsible for maintaining actually gets into the hands of the poor

their own internal control systems to

ensure that funds are spent according to -By evaluating programs’ efficiency and

the provisions of the authorizing and effectiveness has caused many programs to
appropriating legislation be altered as the basis for the inputs in

making future decisions

 In the private sector, managers are
praised for not spending all their funds

Backdoor
but in the government, managers get
bonuses if they turn in surplus because
the principle is “spend it or lose it”

spending -Agencies usually go on a year-end

spending binge to get rid all of their
excess funds and the fourth quarter
obligation tends to be higher but
allows obligations to be
research shows that in practice some of
incurred without going the money is probably wasted or spent
through the normal on equipment or items that have been
appropriation process neglected

-Good management in the public sector

means delivering the service on an
accurate budget
TYPES OF BUDGET
- different types of budget formats are used by
government depending on the desired purpose such
as control, management, planning or performance
and each type of format is designed to accomplish
different goals

- incrementation using the last years budget

dominated the process

- Line-item budget has been the typical format

Two main types of budgets:

OPERATING BUDGET CAPITAL BUDGET

1. Operating Budgets which are in effect for

one fiscal year

2. Capital Budgets include large items such

as buildings and expensive equipment
 1. LINE-ITEM BUDGETS AND
INCREMENTALISM

- allows control by specifying the amount of
funds, line by line in each category, that an agency
receives because decision-makers know in
advance how much money has been allocated for
each category, therefore it is easy to follow how
the money was spent and what was purchased
-best tracking system but does not tell us how
effectively the money was spent and say nothing
about whether the objectives are met
-it simply looks at last year budget as the basis for
constructing next year’s budget

- show exactly where the money goes better than

any other format.
 -the dominant method used by
legislatures and process by which
the budget will increase or decrease

INCREMENTALISM - the most feasible method for the

legislative process studied by Aron
Wildavsky

1.It allows the greatest control over

1.Consistency
REASONS spending
HALLMARK 2.Continuity – the future is an WHY 2.Politicians are not usually technical
experts and they approve many
OF extension of the present which is INCREMEN aspects of a budget without expertise
INCREMEN the continuation of the past TALISM IS 3.Time constraints do not allow for
TALISM POPULAR the more arduous process of
developing objectives
 -popularized by Robert McNamara during the 1960s

2. PERFORMANCE -Budget and Accounting Act of 1950 recommended that the

federal government adopt performance budgeting
BUDGETING:
PLANNING- -it focuses on the objectives and the intention is to ensure
that money is actually achieving something
PROGRAMMING-
BUDGETING -the goal was to make the program more effective so they
need to monitor programs closely to better manage a much
SYSTEMS (PPBS) larger, more complex government

-budgets that focus on management and planning are

intended to move budgeting away from the constraints of
line items and incrementalism toward a rational and more
flexible process that focuses on the results sometimes called
the program-based budgeting

PROGRAM-BASED
BUDGETING SYSTEM
-are a form of performance budgeting that require
the agency to set objectives and lay out a financial
plan to reach the stated objectives
MANAGEMENT BY
OBJECTIVES (MBO)
-involves setting objectives for
agencies and requiring regular
reports on the progress of
achieving the stated objectives
-less formal and simpler than
PBB

-was an effort to bring rationalism into the budget

process

-time-consuming and require an enormous amount

of paperwork
3. ZERO-BASED
BUDGETS (ZBB)
-in theory it is viewed as independent budget
from the previous year and it can also
incorporate objectives thus, it can be viewed
as type of PBB
-But it is the contrast of the PBB and
incremental budgeting
DECISION
PACKAGES
-self-contain units for budget choice that
contain input and output data with
expected levels of performance for each
define level of expenditure

-involves preparing budget proposals and

alternate levels of spending grouped into
“decision packages”

-time consuming and does not justify the

efforts
4. CAPITAL
BUDGETS CAPITAL INVESTMENT
-are separate budgets for assets that will
be used over a longer period of time and -are desirable in both public and
it involve special outlays for items such as private sectors
buildings, bridges and other similar items
that will last for many years -usually help firms to be productive
while in public sector it is
-In contrast operating budgets involve
considered as future investment
purchasing goods and services that will
last only for a year such as office supplies

-the government use arbitrary guidelines

to classify many capital and current
services items
TAXATION,
REVENUES, AND TWO TYPES OF PUBLIC GOODS

EXPENDITURES 1.Social wants – needs that must be

consumed equally

-there are two sides of the 2. Merit wants – public goods

budget – revenues and
expenditures

-government revenues mainly

come from taxes
EXCLUSION PRINCIPLE

-No one likes to pay but it must

-the ability to exclude others from
be collected to pay for the
functions of the government in using a good or a service
order to pay public goods
TAX EQUITY AND TAX
EXPENDITURES
-the concept of tax equity has two primary dimensions which
is vertical and horizontal equity

HORIZONTAL EQUITY VERTICAL EQUITY

-refers to the charging the -refers to the charging
same amount as different differently to those with
tax payers whose income different income levels or
levels is the same ability to pay
 Confusion and debate usually emerge
regarding the fairest way to levy taxes and
the concepts that are involved are regressive
versus progressive tax systems
TAX CONCEPTS
Progressive taxes use brackets that attempt
to adjust equity by placing a greater burden
on those with higher incomes on the belief
that tax structure should be based on the
ability to pay

During periods of high inflation, tax brackets

can be a problem if incomes are not indexed
to account for inflation and indexing involves
adjusting incomes relative to prices

Bracket creep occurred because of rising

prices which caused income to increase and
pushed people into higher income brackets
while losing buying power to inflation
Tax
expenditures
Tax loopholes

are usually not loopholes but are tax

which are simply revenues that could preferences placed there deliberately to
have been collected, but were give a benefit to certain categories of
deliberately not collected people

These include:
The principle of benefits received deals
-tax exemption
with some services where the burden can
-Special exclusions
be placed on those who use the specific
-Special credits
services and the idea of user fees
-Other deductions
epitomizes this concept

12.
Tax
efficiency
refers to a tax that
does not
appreciably affect
the allocation of
resources in the Elasticity
private sector, such is another important
Some taxes expand with
as consumptions, tax-related concept that
economic expansions and
shrink when the economy
and savings, or refers to how well taxes contracts while other taxes are
among competing give and take with inelastic such as “sin taxes”

items for changes in the

from goods like alcohol and
tobacco that are less affected
consumption economy. by the changes in economic
conditions
Tax bases
simply refers to available
amount of taxable goods in a
jurisdiction such as the
amount of income or land that
is subject to taxation and
greatly vary from one
jurisdiction to another
Tax effort Laffer curve
is the concept of taxing a theoretical concept about
aggressively or less taxation that is worth noting
because it is the law of
aggressively
diminishing returns applied
to taxation and develop by
Arthur Laffer
The theory holds that there is an
optimal tax rate that will yield the
highest amount of taxes, and it is
neither the lowest or highest point on
the curve
 MAJOR
TYPE OF
TAXES
Three major methods of
taxation imposed on
taxes:

1.Income (typically -Individual -The income

-The tax is
structure used at the
progressive income taxes) income tax was progressive; the
national level is a net
the main source income tax rather more one earns,
2.Wealth (typically of tax revenue than gross income the more one pays
property taxes) tax (this means that
people are allowed to
deduct items and pay
3.Consumption (typically their taxes on the net
general sales taxes) value)
 Corporate income taxes
SALES TAX are controversial because they are considered
to be a double tax
-Are consumption taxes and very
regressive

-They tax everyone equally but the

burden of those with lower Corporations pay income taxes (based on
incomes is greater net income) and then people holding are
taxed on the dividends
-Primary source of revenue
PROPERTY
TAXES
are tax on personal wealth and tends to be
Circuit breakers
regressive which is the largest source of
income of the LGU are systems developed to
the rationale behind taxing real estate is that
help low-income people
LGU must support property with police, fire, and the elderly cope with
and infrastructure the increased property
it was perceived as unfair by most and is taxes
difficult to administer mainly because of
property valuations

Others force the property value to be based

on the purchase price to keep property
values from rising too quickly

OTHER SOURCES OF TAXES
AND ALTERNATIVE REVENUE
SOURCES:
1.Severance taxes - tax from
natural resources such as coal
and natural gas
2.Internet taxes – a form of
sales or excise tax
-Internet commerce is the
fastest growing areas in the
economy and the states want
to tap this new source of
revenue
-Internet Tax Freedom Act was
established in 1998 due to
levying taxes on data
downloads, and other services
FISCAL POLICY, FISCAL POLICY
MONETARY POLICY -Is the tax and spending policy of the government
and is one primary concerns of the federal budget

AND PUBLIC -Its over-all goals are to manage the economy in

BUDGETING such a way that high level of employment is
sustained, prices remain relatively stable and
economic growth continues

-Slowdowns in economic growth are normal part of

the business cycle but more severe slowdowns are
called recessions, while extreme slow downs are
called depression

-Assumes that there is a relationship between the

total level of spending in an economy and inflation
or unemployment and the total spending usually
refers to the gross domestic product (GDP)
The goal of fiscal policy is
STAGFLATION
achieved when the GDP is at
target level, unemployment - both unemployment and
rate is 4% and the inflation inflation rate rise to a very high
rate is 3%. level

The monetarist school of economics

believes that the monetary supply is
GROSS DOMESTIC PRODUCT the key factor for controlling the
economy
- sum of personal consumption,
Budget is a critical part of fiscal policy
gross private domestic investment,
which affects all of us and is an
government purchases of goods and
ongoing process that can be
services, and net export of goods
renewed each year
and services.
Four primary policy goals of fiscal policy based in
economics:
1. Full employment – in economics view, full employment to
mean that about 4% of the working population is
unemployed in which at this rate the number of people
looking for jobs is about as the number of available jobs.
2. Price Stability – inflation causes prices to
increase
Several conditions where inflation occurs:
1.When too much money in the economy
2.Prices of some commodity significantly rises such as oil
When the inflation rises, there is a shift in the distribution
of real income from those whose incomes are relatively
inflexible to those whose income are relatively flexible
therefore inflation tends to hurt people on fixed incomes.
3. Constant economic growth
– one of the major goals of fiscal policy is to tax and spend
in such a way as to sustain continued economic growth
- As the population increases, it is imperative that economic
growth continues
- When the economy stagnate, tax revenues fall and the
government has to borrow money to pay for the services
which may cause “crowd out” impact borrowing
4. Public goods (or collective goods
- are activities, goods, and services which are public in
nature and are produced to serve the society as a whole
and the public interest
End of
Presentation