Intro to Public Budgeting and Finance exam 1

Power of coercion

-makes government entities different from private, voluntary, and proprietary business
-employs the use of forces, threats, and other forms of coercion to stimulate an outcome

What are public and private businesses interested in?

fiscal sustainability or efficiency

Federal and local government efficiency

Federal: inefficient
Local government: greater efficiency

What does the private budget represent

Make sure you are making money, revenues are greater than expenditures. If it is greater, a long term plan needs to be implemented.

What does the federal budget represent?

Has to be different due to services and goods it provides. The most important is the federal government's nation and international policy direction, and also nation's national economic plan.

Relationship with private sector and government

Private sector can't function without the gov. there would be no law, security, contracts, and the medium to conduct exchange.

two characteristics appear when government must step in to provide goods and services

cost and collectibility

What is non rival linked with

non exhaustion

Pure public good

the cost of providing the service to additional users once the service has been provided is zero, marginal value is zero, the lack (failure) of exclusion

common pool goods

common to pure public goods, goods and services for which exclusion is not feasible but there are competing and exhaustive uses in the private in the private realm rival (fishiries)

Tragedy of the commons

failure of exclusion so leads to exhaustion of good (quotas usually set in place)

toll goods

non rival, one person can consume the good to its fullest but exclusion is possible (turnpikes, toll bridges)

positive externalitites, misallocation of resources

when the good in question is under produced because the benefits in question are not fully represented to society

negative externalities, misallocation of resources

results in overproduction because the costs are not fully borne by the producers of the externalitites

incrementalist insight

happens on all levels of government, policy happens in a slow and incremental pace, this causes the end budget policy being affected more by political power and persuasion. Whoever holds the power can decide budgetary policy regardless if benefits outweigh social costs.

3 levels of government

federal, state, local

federal power

to lay and collect taxes, borrow and coin money, regulate commerce

commerce clause

prevents state interference with international commerce and commerce among other states. This gives taxing power and regulatory power for interstate commerce

What makes toll good profitable?

Exclusion is vehicle for profits and margins

What are the powers of the state?

the tenth amendment "residual powers or powers by states", residual powers clause

Residual powers clause

it establishes as the the sovereign middle layer in the federal system, state power is intra-state

What is local power?

captive of the state and on the bottom of the federal system, dillion's rule, they do not have line item veto power and only on the state level of gov

Dillon's rule

critical limitation on local power, giving the state all the power, the opposite of residual powers clause for states,

What is mandatory spending?

-the spending that must be done by law, according to formula, includes outlays that are made according to definitions of eligibility and establishments of benefits or payment formulas, rather than directly through the appropriation process.
-ensures that payments rise-cost of living and cannot be cut without changes in law
-transfers
-determined through means testing
-70% of the budget is mandatory (means tests and formulas)

What is the largest component of mandatory spending?

social security

What is discretionary spending?

spending which is allotted and can be increased or decreased each year, done according to legislature vote

What is the largest component of discretionary spending and what percentage?

the defense department, 30%

What are the two types of government spending?

purchases and transfer payments

Purchases (gov spending)

divert productive resources (land, labor capital), from private uses by businesses to government use in the provision of public, toll, and common pool goods.

What does government spending result in spending going toward GDP?

$0.40 for every $1 spent going toward GDP, each dollar spent in gov the ratio added to GDP declines

Transfer payments (government spending)

-the largest part of government payments and growth
-transfers\=redistribution\=entitlements
-means testing, social security programs
-75% of the US budget
-accounting and short term time frames are most acute in transfer payments
-provision of aid or money to an individual is not required to provide anything in exchange for payment (subsidy, welfare)

What is means testing?

formulas used to provide transfer payments and always are increasing

Social security in transfer payments

the largest component of transfer payments

What percentage of the current US expenditures by the government are social security programs?

75%

What does the expenditure side of budgeting do?

sets the size of the public sector

What budget is traditional budgeting classification?

line item budget

What does most of the budgets focus on?

The inputs to the flow of services and the purchases needed to respond to the demand for services

Line-item budget

-The least detailed budget showing only revenues and expenses by category, such as labor or supplies
-revenues and expenses are estimated and grouped together into categories
-governments develop complete object classification structures for use across all agencies, but not all agencies will make purchases in all object classes each year
-focused on inputs purchases and cost control

How long are most budgets? (line item)

bi-ennial, 2 year budgets and most common in state and local

How long is the federal budget timeline?

plus 4 year timeline, reflecting future implications and purchases

What are the four steps to the budget process?

(remember it is biennial)
1. final report year - reports fiscal figures for the most recently completed fiscal year, provides standard for comparison
2. the progress report year - what was budgeted for actual year and what the actual result is likely to be for current year
3. budget year - base year numbers reflect what the agency plans for operation, the differences in years due to what has been requested and approved in legislature
4. out years - carry figures for out years beyond the budget year in the request cycle, gov uses budget year plus four out years in executive representations

What level is there no capital budget plan?

federal

proactive vs reactive

-spend and allocate towards highest priority
-each agency should know and budget should reflect priorities
Proactive: early steps to manage money
Reactive: leaves you figuring out the best ways to manage your money after the fact

4 steps in the budget cycle

1. executive preparation
2. legislative consideration
NOT A STEP: has to be approved by conference committee, critical step before execution
3. execution
4. audit and evaluation

3 federal budget process and actors

OMB, CBO, GAO

Office of Management of Budget

-part of the executive office
-appointed by the president
- partisan
-develops the executive budget by consolidating agency requests for appropriations within the guidelines provided by the president and transmits budget to congress

Congressional Budget Office

-provides congress with staff having expertise similar to that of the OMB, central fiscal support agency of the congress
-non partisan, serving all interests in legislature
-CBO\=OMB

Government Accountability Office

watchdog for congress to hold federal departments accountable for their actions. Supervises accounting done by the executive agencies
-non partisan
-emphasizes investigations to improve the effectiveness of the federal gov
-part of the legislative branch and appointed by present with the consent of the senate

percentage of budget for transfers and purchases and outlays for social security

70%- transfers
30%- purchases
40%- social security system

Budget cycle and organizations (3)

1. OMB- executive prep and submission phase
2. CBO- legislative review and appropriation phase
3. GAO - audit and also looking at the importance to looking at effectives and need of gov programs

Budget authority

the result when the senate and house of representatives pass identical statues (conference committee) and the statues are approved of by the president

five types of budget authority

-allows agencies to enter into commitments that will result in immediate or future spending
1. appropriations authority
2. contract authority
3. borrowing authority
4. loan and loan guarantee authority
(1-4 result in discretionary spending outlays)
5. entitlement authority

Two types of agency funding

1) Continuing Resolution
2) Supplemental Appropriation

Supplemental budget authority

immediate need for new funds but the agency has not run out of the appropriate funds it has (national crisis like hurricane so fema needs for funding)

Continuing budget authority

when some agency runs out of money

Discretionary spending

represents the rest of federal spending, and flows through the annual appropriations process
-purchases
-for federal programs and federal bureaucracy includes operation of all agencies within the federal branch
-can control or cut without changing law
-ex: defense, agriculture, commerce, education etc.

Discretionary outlays

can control and cut without changing legislative law

Mandatory outlays

already has entitlement authority and cannot be changed unless law is changed

Local government's largest expenditure

40% of total spending is on education

State government's largest expenditure

33.9% is public welfare programs

line item veto power

The power to strike out sections of a bill without vetoing the entire bill.

How does government collect most of their money?

Excercises their sovereign power to collect coercive payments, no impact on the level of service they will receive due to the lack of exclusion for many services

Largest revenue source by the levels of government

Federal- income and corporate taxes
State- sales and income tax
Local- property ownership

Percentage relationship between employment and drop in sales tax

1% drop in employment leads to a 5% drop in sales tax

Primary goal of taxation

-Transfer control of resources from one group in the society to another and to do so in ways that do not jeopardize, and may even facilitate, the attainment of other economic goals.

Two questions for criteria for tax policy

1. how high should taxes be
2. what is the best tax structure to use

Horizontal vs vertical equity

Horizontal: equal treatment of all taxpayers who have equal capability to pay taxes
Vertical: relationship between the relative tax burdens paid by individuals with different capabilities to pay (more important)

two questions and general equity standards

1. benefits recievied
2. ability to pay (bear the burden)

Regressive vs proportional vs progressive tax equity

Regressive: well off pay a disproportionate amount of tax, if effective rates are lower in high ability groups than in low. Effective rates fall as ability rises
Proportional: equal amount of tax paid by all groups, effective rate are all the same
Progressive: well off pay greater portion of tax than less well off. Effective rates are higher in high ability groups than low, effective rates rise as ability rises

6 economic effects to taxes

1. work vs leisure
2. business operations
3. shopping, purchases, and business location
4. personal management
5. productive investment and financial portfolios
6. savings

Rates and revenue collections relationship

Low rates make revenue collections higher

Cost of collection/making collections relationship

Making collection easier for the consumer make collections higher

Compliance costs and revenue relationship

Low compliance costs increase revenue while installing higher confidence in the government

What are the two types of taxpayer systems

Passive and active

Passive taxpayer system

requires tax collectors to do most of the work and bear the cost of raising revenue (property tax)

Active taxpayer system

privatize much of the collection effort, impose most of the collection responsibility on the private taxpayer (income and retail sales tax)

4 components of transparency

1. Adoption
2. Administration
3. Compliance Requirements
4. Amount of Payment

6 core functions of the tax system

1. taxpayer registration and service
2. declaration or assessment delinquency control and compliance
3. appeal or protest
4. audit
5. enforcement

baseline forecast

to give an idea of surplus/deficit

Common reasons for requesting funds (budget justificiations)

1. higher or lower prices
2. increased demand for service workload
3. methods improvement
4. full financing
5. new services

3 things that an agency does for its budget proposal

1. narrative- mission statement
2. detail schedules- new requests
3. cumulative schedules- new to old requests

7 tricks for deficit reduction

1. rosy scenarios for revenue collection
2. one shots
3. interbudget manipulation
4. bubbles and timing
5. playing the intergovernmental system
6. magic asterisk
7. ducking the decision

budget execution

appropriations approved by legislature to determine funds available for delivery of services during the budget near, more prominent on the state level

What do functioning budgets use?

quarterly allotments by agreement with CBO to establish control

errors sought by the auditors-GAO

1. ghosting (fake employees or supplies)
2.bid rigging (contracts)
3. honest graft (insider trading)
4. diversion (stealing public items for public use)

Pareto criterion

if at least one person is better off from a policy action and no person is worse off, then the community as a whole is unambiguously better off for the policy

3 criterias to start a budget and what budget managers expect

1. fiscal discipline and control
2. allocation of resources to highest priority
3. cost control is the focus

Statutory vs. Effective Tax Rate

Statutory: rate imposed by law on taxable income that falls within a given tax bracket
Effective: percentage of income actually paid after taking into account tax breaks