1.1 Book Overview

The book is subdivided into five parts of varying length: (1) Introduction and role of government in the economy, (2) Recurrent budgets, (3) Capital budgets, (4) Government revenue, and (5) Debt management and forecasting.

Introduction and role of government in the economy: This part serves as an introduction to government finance and budgets. The topics covered in this chapter are (1) the size of federal expenditures (outlays) and revenue and (2) the role of government in the economy. A major emphasis of the chapter is on the purpose of taxation and government intervention in the economy. Topics such as externalities, public goods, and imperfect competition (commonly referred to as market failures) are discussed, all of which justify (to a certain degree) government’s role in the economy. The chapter also covers economic stabilization and redistribution as reasons for government intervention. To better understand this and the remaining chapter(s), you should watch the video Monetary Values over Time, which explains the difference between real and nominal prices.

Basics of Budget Preparation: The focus of this chapter is on recurrent budgets that cover current year expenditures with current year revenue. A recurrent budget is different from a capital budgeting, which is covered later in the book. The goal of a recurrent budget is to ensure that the government’s income matches its spending and thus, promotes fiscal responsibility. We cover the budgeting process, which typically involves a cycle that includes budget preparation, review, approval, and execution. This ensures that each phase is planned and scrutinized before implementation, allowing for effective management of public funds.

Budgeting in the United States: This chapter covers aspects of Federal, state, and local budgets specific to the United States. In the federal budgeting process, several important elements come into play. Institutions, audits, and evaluations are critical for ensuring transparency and accountability throughout the process. Appropriation bills are required for discretionary spending, which funds specific programs and services. Meanwhile, mandatory spending, such as Social Security and Medicare, does not require appropriation bills, as it is governed by existing laws.

Budget Methods and Format: Budget methods and formats vary depending on the needs of the government or institution. Budgets are often classified by categories such as functions, programs, or departments. Cost analysis is essential to ensure that resources are used efficiently and that decisions are based on a thorough understanding of the financial impact. The budget format typically includes examples and breakdowns to show how funds are allocated across different areas, ensuring clarity in the decision-making process.

Cost Analysis: To prepare a budget, institutions need to know the cost associated with service provision. This chapter covers cost accounting and estimation as well as cost allocation.

Capital Budgeting: Purchasing assets that are used multiple years (e.g., bridges, public school buildings, infrastructure in general) require assessment of future cost and benefits, which are covered in this chapter. The characteristics of capital assets is that (1) their useful life is more than one year, (2) the expenditure is non-recurring, (3) the expenditure is usually very large (e.g., infrastructure projects such as bridges or airports). - Usually very large expenditure

Government Revenue: Compared to the previous chapters, which focus on the expenditure side of government activities, this chapter introduce the revenue side. General aspects of taxation such as equity, adequacy of revenue generation, the ability to collect revenue, and economic effects are covered. The various revenue generating activities presented are income taxes (i.e., taxes on individual and corporate incomes), taxes on goods and services (e.g., sales tax, fuel tax), property taxes, and other revenue sources (e.g., driver’s license fees, state lotteries). Property taxes represent the majority of revenue for local governments and are spent locally on on education or public safety. At the state and local level, governments rely on three main sources of revenue: taxes, federal aid, and borrowing. These sources enable them to fund services and infrastructure projects.

Debt management and forecasting: At the federal level, it is important to distinguish between a deficit or surplus and debt. A deficit occurs when the government’s outlays in a given fiscal year exceed its revenues, while a surplus arises when revenues exceed expenditures. In contrast, debt refers to the total amount of money the government owes, accumulated over years of deficits. A key aspect of borrowing involves bonds. When a government or entity issues a bond, it commits to paying the bondholder regular interest and repaying the principal at a future date, known as the maturity date. There are various types of bonds, and their values fluctuate based on interest rates, market demand, and the creditworthiness of the issuer.

Deficit and debt management involve strategies to handle both short-term fiscal imbalances and long-term accumulated debt. This ensures that governments can meet their financial obligations while maintaining economic stability.