3 Basics of Budget Preparation
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This chapter covers the basics of budgets such as the budget function, budget purpose, and budget preparation. It also introduces governmental funds and governmental accounting. For now, the focus is on so-called recurrent budgets as opposed to capital budgets. Recurrent budgets finance current expenditures with current revenues. Capital budgets—which are covered in a later chapter—finance large expenditures with a multi-year lifespan with future tax revenues (e.g., debt financing) due to fairness issues.
Before we start introducing budget basics, consider your personnel budget, which may help think about the budget aspects of the government. You may have a planned allocation of money to various categories such as housing, food, apparel, or health care. You also have various (competing) considerations regarding allocation based on your martial status, number of children, expected income, and so on. You may also have rainy day funds available and you make a distinction between routine expenditures (e.g., food) and long-term investments (e.g., car). In any case, your personnel financial situation is likely improved due to presence of budget. Note though that the spending activity of a government results in different economic outcomes, which are covered in later sections, than your personnel budget.
Budgeting is the process of developing, implementing, and evaluating a budget. The political scientist Aaron Wildavsky (1930-1993) stated the following:
The budget is the lifeblood of the government, the financial reflection of what the government does or intends to do.
The crucial aspect of budgeting is whose preferences are to prevail in disputes about which activities are to be carried on and to what degree, in the light of limited resources.
A budget is a plan to allocate public resources and there is no policy without a budget. It serves as a decision guide for the provision of governmental goods and services. The spending in various categories and the revenue collection also reflect policy choices made by the government. There are many budget aspects to consider such as the types and extent of goods and services provided, the size of the government relative to the private sector, the relative size of departments and agencies within the government, or the methods to raise revenue. On a historical side note, the focus of initial budgets was theft prevention.
Budgets drive public policy with multiple and often conflicting objectives (e.g., empty reservoir for flood control versus full reservoir for recreation). There is also no standard measure of objectives. For example measuring a reduction in traffic fatalities is much simpler than gains from cleaner rivers. Consider two examples that fullfil multiple objectives:
- Subsidizing school lunches both feed children and creates income support.
- Needle exchanges for drug users reduce the public health risk of HIV infections as well as lifetime treatment cost, which is estimated to be around $379,668).
Place-based versus people-based resource allocation
- Simple treatments of abandoned buildings and vacant lots returned conservative estimates of between $5.00 and $26.00 in net benefits to taxpayers and between $79.00 and $333.00 to society at large, for every dollar invested (Source: New Yorker “The other side of broken windows”)
Implications for the budgeting process
- Participatory
- Confrontational
- Compromising
Forecasts are the basis for budget development even if those forecasts change over the lifetime of the budget. For example, it is important to know the effect of economic growth on tax revenue and expenditures in terms of transfer payments for unemployment insurance. Another example would be a snowfall forecast and plan (with the necessary budget) by the Department of Transportation. Different response plans and/or policies based on identical forecasts lead to different budgets.
It is also important to differentiate budgets and political rhetoric. Consider the following sentence:
For education, I maintain our commitment from last year and note that my budget includes direct educational grants to cities and towns of $2,026,000,000.
Although the sentence is factually correct, inflation and/or additional students my potentially decrease the level of services.