Public Budgeting

Abstract

This article will focus on the U.S. federal and state public budgeting processes. Areas of discussion will include an overview of the elements of a federal public budget and history of public budgeting reform and budgeting formats. In addition, the public budgeting cycle and public budget revenue parameters will be described and analyzed. Issues related to the problem of competing stakeholder agendas in the public budgeting process will be addressed.

Overview

Public budgeting is an integral part of the United States system of democratic government. Public budgeting refers to the political and technical process of matching and allocating monetary resources, such as taxes, fees for service, debt instruments, and funds from other levels of government, with individual and program needs. The public budgeting process serves a wide range of fiscal, administrative, financial, and governance purposes. Public budgeting may be seen as the place or process through which stakeholders debate competing agendas, perspectives, and viewpoints about the public good or the common good. Budget actors or stakeholders may play multiple roles in the public budgeting process. For example, citizens serve the roles of voters, taxpayers, and clients. Multiple role expectations are common in democratic governments and societies (Morgan, 2002).

Public budgeting is the process that produces a public budget, a consensus of the best ways to allocate tax revenues to fund public programs that benefit the common good. Public budgeting is often referred to as a scarcity allocation problem. Public budgeting is used for purposes of promoting economic growth, employment, and income distribution. Public budgeting is considered to be a part of development economics in general and, more specifically, a part of economic planning (Premchand, 2001).

Public budgeting processes, and their related public budget documents, reflect the political and social conditions of their times. During the twentieth century, public budgets were alternately characterized by focus on financial control, managerial improvements, planning, prioritization, and accountability depending on the historical context. While public budgeting is a technical process, public budgeting is also a social and historical process.

Public budgeting occurs at all levels of government including national, state, and local levels. The 2012 Census of Government, published by the US Census Bureau, reported that as of that year there were 90,056 local governmental units in the United States. All of these governmental units undertake a public budgeting process. Some elements of public budgeting apply to the public budgeting process of all levels of government and some are level and region specific.

This article will focus primarily on the U.S. federal and state budgeting processes and will introduce issues faced by local or international public budgets when appropriate. The following sections, including elements of a federal public budget and history of public budgeting reform and budgeting formats, will serve as an introduction and foundation for later sections on the public budgeting cycle and public budget revenue parameters. Issues related to the problem of competing stakeholder agendas in the public budgeting process will be addressed.

Elements of a Federal Public Budget. Public budgets, at all levels of government, serve at least five major functions in society and government (Morgan, 2002):

• Public budgets fund programs that are responsive to public needs.
• Public budgets fund programs that are effective in accomplishing stated goals.
• Public budgets fund cost-effective programs.
• Public budgets communicate to all stakeholders.
• Public budgets use the public budget to strengthen the economy.

While size and scale of public budgets vary between levels and types of government, all public budgets involve the stages of development, adoption, implementation, and reconciliation (Morgan, 2002).

The federal budget is considered to be unique among public budgets due to its multiple stakeholders and massive scale. The federal budget presents the essential elements of the financial plan of the federal government for the coming year. The federal budget, as described in the 1967 Report of the President's Commission on Budget Concepts, is responsible for the following actions and initiatives (Curry, 1998):

• The federal budget sets forth the president's requests to Congress for new programs, appropriation of funds, and changes in revenue legislation.
• The federal budget proposes an allocation of resources to serve national objectives, between the private and the public sectors, and within the public sector.
• The federal budget embodies the fiscal policy of the government for promoting high employment, price stability, healthy growth of the national economy, and equilibrium in the nation's balance of payments.
• The federal budget provides the basis for executive and agency management of federal government programs
• The federal budget gives the Treasury needed information for its management of cash resources and the public debt.
• The federal budget provides the public with information about the national economy essential for private business, labor, agriculture, and other groups, and for an informed assessment by citizens of governmental stewardship of the public's money and resources.

The federal budget, while it maintains the principles, goals, objectives described in the 1967 Report of the President's Commission on Budget Concepts, has taken multiple different forms and formats during the twentieth century. The public budgeting process, described in the following section, is not fixed but is instead a fluid and socially and historically responsive process.

History of Public Budgeting Reform & Budgeting Formats. Throughout the twentieth century, public budgeting stakeholders debated the appropriate or preferred budget formats. Twentieth century public budgeting reforms, such as program budgeting and performance budgeting, reflect the specific needs of government and society during the time they were developed. In the United States, public budgeting and budget reform have experienced at least five distinct periods during the twentieth and twenty-first centuries:

• Control characterized turn of the century public budgeting.
• Management characterized New Deal and post-World War II public budgeting.
• Planning characterized 1960s public budgeting.
• Prioritization characterized 1970s and 1980s public budgeting.
• Accountability characterizes public budgeting since the 1990s.

The idea and practice of public budgeting developed at the end of the nineteenth century. At the turn of the nineteenth century, the United States did not yet have an established budget system. Congress raised, voted on, and distributed money largely without consistency or accountability.

During the late nineteenth and early twentieth centuries, the influx of millions of immigrants in American cities created political and social turmoil and change. The professions of accounting, administration, and social work grew due to need from growing American cities and these professions promoted municipal finance reform. The professions of accounting, administration, and social work lobbied for budget or fiscal reform in the interest of producing safe, clean, and economically managed cities.

In the early 1900s, budget reform was characterized by a switch from the established budgeting practice of the Legislative Budget to the Executive Budget. In 1921, the Budget and Accounting Act, which established an executive budget at the national level in the United States and became the foundation for present day budgeting at the federal level, was passed by Congress. The new executive budget was coupled with the new idea and practice of a line-item, or object-of-expenditure, budget (Tyler & Willand, 1997). Line-item budgeting includes objects or lines of expenditure, such as personnel and supplies, which are the focus of development, analysis, authorization, and control of the budget. Governmental organizations often prefer line item budgeting as line-item budgeting allows budget officials to move money between line-item sub-codes with ease (Morgan, 2002).

In 1949, the Commission on Organization of the Executive Branch of Government recommended that budget information for the national government be structured in terms of activities rather than line-items and that performance measurements be included with performance reports (Tyler & Willand, 1997). This budget reform created the practice of program budgeting. Program budgeting promotes budgets that are formulated and appropriations that are made on the basis of expected results of services to be carried out by programs. Programs refer to a separately identifiable and managerially discrete function within an organization designed to meet a statutory requirement or a defined citizen need. There are five main steps in program budgeting including a mission statement, goals, objectives, activities undertaken to achieve the objectives, and a summary integration of activities into a program. Critics of program budgeting argue that the absence of line-item budget information and reliance on broad program labels obscures frequent subprogram changes (Morgan, 2002).

The next period of budget reform, which occurred in the 1960s, prioritized variables of performance and planning. The key elements of program budgeting included long-range planning, goal setting, program identification, quantitative analysis, and performance analysis. The fields of economics, the data sciences and planning promoted and practiced performance budgeting (Tyler & Willand, 1997). Performance budgeting creates budgets based on programs, focused on program goals and objectives, measured by short-term outputs, projected long term outcomes, and cost-benefits analysis. Performance budgets prioritize the measurement of results when deciding on the allocation of budget resources. Performance budgeting serves management purposes by providing an opportunity for managers to determine whether an organization is achieving its general and specific goals (Morgan. 2002).

American politics of the 1970s and 1980s, characterized by a call for reexamination of public support for government, challenged previously established and publicly accepted levels of taxation. The public, during this time, voted for lower taxes and reduced support for government social services. The 1990s was a period of budget reform. Two federal acts resulted in major changes to the public budgeting process. First, the Chief Financial Officers Act of 1990 (P. L 101-576) required the development and reporting of systematic measures of performance for twenty three of the larger federal agencies. Second, the Government Performance and Results Act (GPRA) of 1993 (P. L. 103-62) required federal agencies to prepare strategic plans by 1997, to prepare annual performance plans starting with fiscal year 1999, and submit an annual program performance report to the President and Congress comparing actual performance with their plans beginning in the year 2000 (Tyler & Willand, 1997). Nevertheless, according to Mikesell & Mullins (2011), despite robust improvements to budgeting systems, government finances declined in the early twenty-first century even where the private sector experienced considerable prosperity.

Current public budgeting is characterized by variables such as government accountability, performance requirements, and program justification such as those seen in zero-based budgeting. Zero-Based Budgeting creates budgets that subject all programs, activities and expenditures to justification processes. The key elements of the zero-based budgeting format include ranked base budgets and decision units. In zero-based budgeting, funding requests, recommendations, and allocations for existing and new programs are ranked on the basis of alternative service levels. Zero-based budgeting can be used in conjunction with line-item budgeting or program budgeting (Morgan, 2002).

Ultimately, public budgeting, in all the formats described above, is a process of allocating scarce societal resources. Federal, state, and local governments go through cycles of budgetary consensus and budgetary dissonance and disagreement. Historical analysis illustrates that public budgeting is a cyclical and dynamic process (Joyce, 2005).

Applications

The Public Budgeting Cycle. The public budgeting cycle includes five main phases:

• Construction of the program and agency or department requests.
• Compilation of the agency or department requests into a government-wide recommended budget.
• Review and legislative adoption.
• Agency or departmental implementation.
• Audit and reconciliation.

The budget cycle provides and prescribes order for what is often a chaotic and confrontational process. The budget cycle depends on three main principles to facilitate budget creation: base budget, fair share, and incrementalism. These three principles, which reduce conflict and the need for extensive analysis, serve as short cuts that allow stakeholders to focus on new issues rather than revisit already established decisions and programs:

• Base budget: the presumption by agencies, programs and participants in the budgeting process that they will be able to obtain support for an existing base of services without providing extensive analysis and justification.
• Fair share: the practice of asking for similar increases or across-the-board cuts from all departments and programs.
• Incrementalism: the practice of maintaining a fixed base with only small annual changes.

The public budgeting cycle incorporates and depends on technical analysis by budget and revenue analysts. Relevant types of technical analysis include projections of current expenditure and revenue trends, predictions of future revenues and spending, and assessment of the impacts of fiscal agreements.

The public budgeting process is, in certain circumstances, open to change. The executives and legislatures, with political agreement, may revise budget processes to meet changing political and fiscal needs. The ideal public budgeting process, which is the engine of democratic government, is transparent, open, and fair. The stakes of the public budgeting process include both the nation's finances and the stakeholder relationships. Public budgets, which must be approved by multiple stakeholders with competing agendas, require compromise (Morgan, 2002).

Establishing Budget Revenue Parameters. The parameters of the public budget are established through revenue forecasting. Revenue forecasting influences the levels of expenditure and program service. Revenue forecasting involves forecasting or predicting the sources, timing, and level of the revenues that will be available for use in the budget during the next budget period. Predicted or forecasted revenue levels establish the upper limit for the proposed level of spending in the budget. Revenue forecasters factor variables, such as policy visions, political agreements, and citizen support, into their forecasts. Ultimately, the revenue forecast is distributed as a public document. The revenue forecast is reviewed by stakeholders and determined to be credible or not. Challenges to the credibility of revenue forecast stall the public budget making process.

The public budgeting process includes multiple revenue sources such as intergovernmental transfers, taxes, fees for uses and services, sale of products and assets, rents, debt instruments, and lottery (Morgan, 2002):

• Intergovernmental transfers: revenues provided to a jurisdiction by other levels of government or other agencies. Examples of intergovernmental transfers include direct grants without restrictions, direct grants for the performance of service, matching funds, and reimbursements.
• Taxes: a financial charge or other levy imposed on an individual or a legal entity by a state, city, or national government. Examples of taxes include personal income tax, corporate income tax, sales tax, property taxes, per gallon motor fuels tax, a weight mile tax on heavy trucks, a cigarette and tobacco products tax, forest severance taxes, insurance taxes, and gift and inheritance taxes.
• Fees for use and services: the charges made by governmental jurisdictions for the services provided to an entity that may have a demand for a service or expertise.
• Sale of products and assets: revenues generated through the sales of products and commodities such as the lease of state properties.
• Debt instruments: borrowing funds through the sale of bonds or other financial instruments.
• Lottery: net proceeds from lotteries and other gaming endeavors. Lottery and other gaming revenues contribute to the budget categories of job creation, economic development, public education, protection of the environment, and public health.

Issues

Purposes of Public Budgeting. Public budgeting, performed by budget analysts, program managers, and administrators, requires compromise and balance between variables such as the existing preferences of voters, the needs of future generations, the promotion of a vibrant economy, the maintenance of the fiscal health of the government, and cost effectiveness. Stakeholders debate the purpose and function of the public budgeting process. Ultimately, despite the presence of differing opinions and agendas, the public budgeting process must be responsive to its multiple stakeholders and serve multiple purposes (Morgan, 2002).

Public budgeting may serve as a governing tool. The public budgeting process, which includes legislative oversight and audit functions, provides the tools to insure financial accountability to citizens. The budget compliance and accountability procedures generate confidence from elected officials and the public and instill the belief that the government and its programs are serving the public good.

Public budgeting may serve as a communication tool. The public budgeting process and its documents serve as communication tools that convey budget information to stakeholders including the general public, advocates, legislators, agency personnel, and program administrators. The public budgeting process communicates the government's intentions to its citizens. The public budgeting process provides a routine and consistent vehicle for transmitting its message. The government relies on the mass media to transmit budget information and materials to the general public through press conferences and news stories.

Public budgeting may serve as an influence on the economy. The public budgeting process has significant impact on the economy. Public budgets are characterized by the following economic objectives: fund social service programs for those in need; reflect tax policy that affects business and individuals; fund education and other training programs that enhance the state's human and economic resources; fund the direct and the contracted production of goods and services; fund routine purchases and capital projects that stimulate economic activity; redistribute wealth across the nation's residents; and fund economic development efforts to attract and help distribute economic activity across the nation.

Public budgeting may serve as political opportunity for newly elected officials. The public budgeting process provides numerous political opportunities for politicians and special-interest groups to promote his, her, or their viewpoints about public spending and resource allocation. The public budgeting process provides opportunities for politicians to act on campaign promises and transmute promises and a political platform into funded programs and initiatives.

Public budgeting, while it serves the multiple purposes described above, also serves to more or less maintain the status quo in the economy, programs, society, and government. The principle and practice of budget incrementalism, common in American public budgets, allows for small, measured annual increases in public budgets without analysis and justification. While the U.S. government has incorporated some program, planning, and justification elements into the public budget, the public budget, more often than not, is allowed to grow because of the practice of incrementalism (True, 1995). The enduring public budgeting practices, which include incremental budgeting to promote status quo and slow policy change and line-item budgeting to promote financial accountability, establish the parameters for the usefulness and credibility of the public budget (Kelly, 2005).

Conclusion

Public Budgeting & Democracy. In the final analysis, the public budgeting process of the U.S. government is characterized by reform and change. Twentieth century budget reform reflected changing perspectives on the appropriate role of government in American society. The theory of public budgeting is a theory of political cycles led by changing public opinion about the proper role of government and use of resources (Kelly, 2005). Ultimately, public budgeting, in all of its changing formats and supporting theories, is the foundation for democratic government. In American democracy, multiple stakeholders work collaboratively to determine the best use of shared public resources (Rossmann & Shanahan, 2012).

Terms & Concepts

Base Budget: The amount set aside in a budget year for funding the same program and performing the same services as are planned for the current year.

Budget: A plan for the expenditure of funds to support an agency, program, or project.

Budget Reform: Changes in a public budget caused by shifting socio-political factors.

Federal Government: A form of government in which a group of states recognizes the sovereignty and leadership of a central authority while retaining certain powers of government.

Incrementalism: The practice of maintaining a fixed base with only small annual changes.

Line Item Budgeting: Budgets including objects or lines of expenditure that are the focus of development, analysis, authorization, and control of the budget.

Performance Budgeting: Budgets measured by short-term outputs, projected longer term outcomes, and cost/benefits analysis.

Program Budgeting: Budgets that are formulated and appropriations that are made on the basis of expected results of services to be carried out by programs.

Public Budgeting: The political and technical process of matching and allocating monetary resources, such as taxes, fees for service, debt instruments, and funds from other levels of government, against individual and program needs.

Stakeholders: Individuals or organizations who stand to gain or lose from the success or failure of a system.

Zero-Based Budgeting: Budgets in which all programs, activities and expenditures are subject to justification.

Bibliography

Cuny, T. (1998). Federal budget concepts — bright lines or black holes? Public Budgeting & Finance, 18, 94. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=1320711&site=ehost-live

Joyce, P. (2005). Federal budgeting after September 11th: A whole new ballgame, or is it déjà vu all over again? Public Budgeting & Finance, 25, 15-31. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN= 15998939&site=ehost-live

Kelly, J. (2005). A century of public budgeting reform: The "key" question. Administration & Society, 37, 89–109. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=16109700&site=ehost-live

Mauro, S. G., Cinquini, L., & Grossi, G. (2017). Insights into performance-based budgeting in the public sector: a literature review and a research agenda. Public Management Review, 19(7), 911–931. doi:10.1080/14719037.2016.1243810. Retrieved March 6, 2018, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=123287696&site=ehost-live&scope=site

Mikesell, J.L., & Mullins, D.R. (2011). Reforms for improved efficiency in public budgeting and finance: Improvements, disappointments, and work-in-progress. Public Budgeting & Finance, 31, 1–30. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=73908541&site=ehost-live

Morgan, D. (2002). Handbook of public budgeting. [Electronic Version]. Portland, OR: Hatfield School of Government, Portland State University. Retrieved April 28, 2007, from http://www.eli.pdx.edu/erc/morgan/handbook6.doc

Premchand, A. (2001). Public budgeting and economic development: evolution and practice of an idea. International Journal of Public Administration, 24, 1023–1039. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5149323&site=ehost-live

Rossmann, D., & Shanahan, E.A. (2012). Defining and achieving normative democratic values in participatory budgeting processes. Public Administration Review, 72, 56–66. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=70093873&site=ehost-live

Tyler, C. & Willand, J. (1997). Public budgeting in America: a twentieth century retrospective. Journal of Public Budgeting,Accounting and Financial Management, 9, 189. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9712042873&site=bsi-live

True, J. (1995). Is the national budget controllable? Public Budgeting & Finance, 15, 18–32. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=11168229&site=ehost-live

United States Census Bureau. (2012). 2012 Census of governments: the many layers of American government. Retrieved March 6, 2018, from https://www2.census.gov/govs/cog/2012/2012‗cog‗map.pdf.

Suggested Reading

Jordan, M., & Hackbart, M. (1999). Performance budgeting and performance funding in the states: a status assessment. Public Budgeting & Finance, 19, 68-88. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=2332016&site=ehost-live

Robinson, M. (2000). Contract budgeting. Public Administration, 78, 75-90. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3024266&site=ehost-live

Rubin, I. (1991). Budgeting for our times: target base budgeting. Public Budgeting & Finance, 11, 5-14. Retrieved April 30, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9709170485&site=ehost-live

Sicilia, M., & Steccolini, I. (2017). Public budgeting in search for an identity: state of the art and future challenges. Public Management Review, 19(7), 905-910. doi:10.1080/14719037.2016.1243809. Retrieved March 6, 2018, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=123287695&site=ehost-live&scope=site