BUDGETING Lecture 8
WHAT IS A BUDGET? A plan for spending and saving money Most people think budgets are: Rigid and inflexible Painful – who wants to eat Top Ramen every night! No fun! A budget takes the fun out of money – Mason Cooley
SOME DEFINITIONS Ø Ø Appropriation – provision of law authorizing the expenditure of funds Budget Authority – the authority provided by law to incur financial obligations that will result in outlays Obligation – binding agreement that will result in outlays, immediately or in the future Outlay – payment to liquidate an obligation 3
SOME DEFINITIONS Ø Ø Revenues - funds collected by the exercise of the government's sovereign powers, such as taxes, duties, and fines Receipts – funds taken in by the government and include revenues and offsetting receipts Deficit – the amount by which outlays exceed receipts in a fiscal year Surplus – the amount by which receipts exceed outlays in a fiscal year 4
MORE DEFINITIONS Ø Ø Ø Apportionment – distribution made by OMB of amounts available for obligation in an appropriation Impoundment – an executive action or inaction that temporarily or permanently withholds, delays or precludes the obligation or expenditure of budgetary resources Deferral - an executive action or inaction that temporarily withholds, delays or precludes the obligation or expenditure of budgetary resources 5
MORE DEFINITIONS Ø Rescission – proposal by the President to reduce budgetary resources Ø Debt - value of outstanding securities issued by the federal government to finance borrowing Ø Fiscal Year – the Government’s accounting period 6
WHY BUDGETS MAKE SENSE Budgets help you: Set priorities Achieve what’s important to you A good budget is: Realistic Ongoing Clear and easy to use
BUDGET CATEGORIES Income Gross Net Savings Emergencies Long-Term Retirement Short-Term Expenses Fixed Variable Discretionary
INCOME: MONEY EARNED Gross income: An individual’s income before taxes Net income: Income after taxes are paid Taxes can range from 15% to 31%
TAXES AND DEDUCTIONS First job pays $30, 000/year. Your salary is your gross income. Take off at least 25% for taxes and other deductions. That’s what’s left for you to spend. Example: Gross salary Minus 25% taxes and deductions Net income = $30, 000 - 7, 500 $22, 500
SAVINGS: PAY YOURSELF FIRST Savings: unspent income Types Emergencies: Plan to set aside three months’ living expenses Long-term: Large ticket items (house, car, college) Retirement: It’s never to early to start Short-term: Vacation, clothes, new skis
EXPENSES Expense: A cost to meet a need or pay a debt Types of expenses Fixed Variable Discretionary
NEEDS VS. WANTS Needs are essentials Food Shelter Clothing Transportation Wants are extras Eating out Big, expensive house Shop till you drop Brand-new or expensive car
FIXED EXPENSES A cost that occurs regularly and doesn’t vary in amount Rent Mortgage Car payment Insurance premium School loans Others?
VARIABLE EXPENSES A cost that occurs regularly but may vary in amount: Electricity Water and Garbage Telephone Gasoline Groceries Others?
WAYS TO REDUCE Make a shopping list Study Buy YOUR GROCERY grocery ads store-brand products Avoid Learn impulse purchases the basic prices of your favorite foods. BILL
DISCRETIONARY EXPENSES A cost determined by personal wants that may be controlled Movies, videos, CDs Sports Eating out Grooming and clothes Concerts and plays Vacations Others?
BUDGET SUMMARY Establish a budget: Income Savings Expenses Variable Fixed Discretionary End up with a budget surplus and you’re a success!
SOME BASIC FEDERAL BUDGET PRINCIPLES Ø President submits budget to Congress for following fiscal year Ø Budget is on a cash basis Ø Federal agencies cannot spend money unless authorized and appropriated Ø Congress can pass “special” or “emergency” appropriations Ø Budget resolutions and appropriations bills reflect spending priorities of Congress 19
BUDGET PROCESS AND POLITICS To budget is to fight over money There will always be friction among congressional committees and between those who make tax policy and control spending The budget process is the means by which this conflict is channeled to enable agreement each year
THE BUDGET PROCESS It is a political decision-making process, making political choices about the values. Who will receive government benefits? What actions does society think are needed, what are our values—and how do they get translated into governmental action?
FISCAL POLICY Budgeting: objectives AND BUDGET plan to carry out policy Expenditures: who gets what for how much? Revenues: who pays how much by which means? Fiscal Policy: the impact of federal government expenditures and revenues on the economy. Managing the economy
WHAT IS A BUDGET? A plan for how the government spends our money Needs, priorities, estimates A plan for how the government will pay for its activities Estimates and impacts
ENDURING ISSUE Budgeting is a political process occurring in a political arena for political advantage versus: Budgeting as a rational means to provide for the efficient, effective, and equitable distribution of the nation’s wealth to achieve publicly desired purposes.
GOVERNMENT EXPENDITURES Two categories: Government purchases Government employee wages Purchases of goods/services from private sector Represents government contribution to GDP Transfer payments Social security, Medicaid payments, retirement payments Income but not service
THE FEDERAL DOLLAR – WHERE IT GOES
WHERE THE MONEY COMES FROM Individual income taxes Social insurance payroll taxes Corporate income taxes Excise taxes Borrowing User fees
THE FEDERAL DOLLAR – WHERE IT COMES FROM
WHERE THE MONEY GOES Social Security – 23% Medicare – 12% Medicaid – 7% Means tested entitlements – 6% Federal insurance programs – 6% National Defense – 16% Non-Defense – 19% Interest Payments – 11%
TYPES OF TAXES General property tax General sales tax Individual Income tax Corporation income Selective excises: Motor fuel Cigarette Alcoholic beverages – STATE/LOCAL
STATE AND LOCAL GOVERNMENT REVENUES, FY 1996 Source: Department of Commerce, Bureau of the Census
BUDGET AS FISCAL POLICY Budget: influences the economy? What role does the deficit play? Is it inherently bad?
BUDGET AS FISCAL POLICY: THEORY A government surplus slows economic growth by draining money from the economy. A government deficit pumps money into the economy and promotes economic growth.
QUESTIONS Should the budget be balanced? Why is it hard to cut the budget? What is the role of public administration in making budgets, cutting budgets, and deficits?
MANDATORY/DISCRETIONARY SPENDING Mandatory: Must spend Debt: interest payments Entitlement programs, such as social security, retirement, VA benefits, Medicaid: based on eligibility rules. Outlays can’t be increased/decreased without change in substantive law Discretionary: More choice in making cuts Everything else: Signifies form of spending, not priorities
MANDATORY SPENDING Non-means-tested: Everyone eligible receives assistance Social security, Medicare, Medicaid, federal military/civilian retirement, unemployment compensation Means-tested: Those with limited income eligible Medicaid, food stamps, supplemental security income programs, Temporary Assistance for Needy Families
TAX EXPENDITURES Tax Expenditures: tax revenues foregone because of policies that provide exemptions through the tax code.
IDEAL BUDGET Accurate Bottom line Shows expenses and revenues Comprehensive Consolidated: no off-line items Comparable over time Shows history: past year, current year, budget year Timely
LINE ITEM BUDGET Familiar Every item has a dollar value Simple, cheap to prepare, easy to read Parallels accounting system Purpose: accountability
LINE ITEM BUDGET Pros: Good for control and accountability Simple to use and prepare Cons: Doesn’t tell what units are doing with its money Doesn’t indicate levels of efficiency Doesn’t address value
PERFORMANCE BUDGETING Links costs to activities Identifies specific outputs to be produced by activities/services Sets targets for achievement Makes budget requests based upon these projected performance targets
PERFORMANCE BUDGET Pros: Control costs Measure efficiency of activities Estimate future expenditures Cons: Need to distinguished between fixed and variable costs Efficiency not the only needed measure; is this a service the public wants?
WHAT INFORMATION DOES THE BUDGET PROVIDE? Ø Provides actual or estimated data Amount by account that each agency may obligate the agency to pay (budget authority) and estimates of payments (outlays) Amount of receipts each agency collects Budget authority, outlays and receipts Actual or estimated surplus or deficit 43
For Most of the last 40 Years, the Government of US has Spent More than it Collected 44 22. 8% 19. 6% Source: CBO’s Baseline Budget Outlook – January 2010
QUESTIONS
