Public budgeting
Public budgeting is a field of public administration and a discipline in the academic study thereof. Budgeting is characterized by its approaches, functions, formation, and type.
Authors Robert W. Smith and Thomas D. Lynch describe public budgeting through four perspectives. The politician sees the budget process as "a political event conducted in the political arena for political advantage". The economist views budgeting as a matter of allocating resources in terms of opportunity cost where allocating resources to one consumer takes resources away from another consumer. The role of the economist, therefore, is to provide decision makers with the best possible information. The accountant perspective focuses on the accountability value in budgeting which analyzes the amount budgeted to the actual expenditures thereby describing the "wisdom of the original policy". Smith and Lynch's public manager's perspective on a budget is a policy tool to describe the implementation of public policy. Further, they develop an operational definition:
A "budget" is a plan for the accomplishment of programs related to objectives and goals within a definite time period, including an estimate of resources required, together with an estimate of resources available, usually compared with one or more past periods and showing future requirements.
Leading definitions
- Practical: "A plan for financing an enterprise or government during a definite period, which is prepared and submitted by a responsible executive to a representative body whose approval and authorization are necessary before the plan may be executed." ~Frederick A. Cleveland
- Theoretical: The leading question: "On what basis shall it be decided to allocate x dollars to activity A instead of activity B?" ~V. O. Key Jr.
Leading theorists and contributions
- Frederick Cleveland: constructed a practical definition of budgeting.
- William F. Willoughby: describes the purpose of a budget document.
- V. O. Key, Jr.: sparked the normative question regarding how scarce resources ought to be distributed to unlimited demands.
- Verne B. Lewis: argued for a budgeting theory based on economic values; strongly contributing to the study of public finance.
- Richard A. Musgrave: the Father of Public Finance; identified the three roles of government in the economy: allocation of resources, distribution of goods and services, and economy stabilization.
- Aaron Wildavsky:suggested that budgetary decision making is largely political, rather than based on economic conditions.
- Allen Schick: outlined the three functions of budgeting:
- Strategic Planning; deciding on the goals and objectives of an organization.
- Management Control; management's process of assuring effective and efficient accomplishment of goals and objectives laid out via strategic planning.
- Operational Control; focused on proper execution of specific tasks that provide the most efficient and effective means of meeting the goals and objectives ordered by management control.
- Irene S. Rubin: facilitated the discussion of the dichotomy between theory and practice of public budgeting.
Approaches to budgeting
- Line Item Budgeting is arguably the simplest form of budgeting, this approach links the inputs of the system to the system. These budgets typically appear in the form of accounting documents that express minimal information regarding purpose or an explicit object within the system.
- Program Budgeting takes a normative approach to budgeting in that decision making—allocating resources—is determined by the funding of one program instead of another based on what that program offers. This approach quickly lends itself to the PPBS budgeting approach.
- PPBS Budgeting or—Program Planning Budgeting System—is the link between the line-item and program budgets and the more complex performance budget. As opposed to the more simple program budget, this decision making tool links the program under consideration to the ways and means of facilitating the program. This is meant to serve as a long-term planning tool so that decision makers are made aware of the future implications of their actions. These are typically most useful in capital projects. The planning portion of the approach seeks to link goals to objects or expected outcomes from specific outputs, which are then sorted into programs that convert inputs to outputs; finally, the budgeting of PPBS helps determine how to fund the program. A leader in the promotion of PPBS was Robert McNamara's use in the United States Government's Department of Defense in the 1960s.
- Performance Based Budgeting attempts to solve decision making problems based on a programs ability to convert inputs to outputs and/or use inputs to affect certain outcomes. whatever Performance may be judged by a certain program's ability to meet certain objectives that contribute to a more abstract goal as calculated by that program's ability to use resources efficiently—by linking inputs to outputs—and/or effectively—by linking inputs to outcomes. A decision making—or allocation of scarce resources—problem is solved by determining which project maximizes efficiency and efficacy.
- Zero-based budgeting is a response to an incremental decision making process whereby the budget of a given fiscal year is largely decided upon by the existing budget of FY-1. In contrast to incrementalism, the allocation of scarce resources—funding—is determined from a zero-sum accounting method. In government, each function of a department's section proposes certain objectives that relate to some goal the section could achieve if allocated x dollars.
- Flexible Freeze is a budgeting approach pioneered by President George H. W. Bush as a means to cut government spending. Under this approach, certain programs would be affected by changes in population growth and inflation.
- Program Assessment Rating Tool is an instrument developed by the United States OMB to measure and assess the effectiveness of federal programs that review the program’s purpose and design, strategic planning, program management, and program results and accountability. The scores are rated from effective, moderately affective, adequate, and ineffective.
- Priority Based Budgeting is a response to poor economic conditions. As opposed to incremental budgeting, where resource allocation is determined based on marginal shifts in costs, priority based budgeting fixes the amount of governmental resources and then allocates resources across the various programs. The programs receive their allocation based on their priority; priorities may include safe and secure communities, health, education, and community development among others. Outcome assessment then determines the efficacy of the programs. Although this approach is pro-democratic, critics suggest the administration of this process is extremely difficult.
Functions of a budget document
to the traditional control function, the monitoring function focuses on the consequences of expenditures.
Steering: as a response to the traditional management function, the steering function serves as a guide for managing.
Strategic Brokering uses the budget document as a means of constantly looking for possible directions and reacting to the environment.
Values in budgeting
Three values are generally discussed in the literature of public budgeting: accountability, efficiency, and efficacy.Accountability focuses on the inputs going into the system or program in action and is best characterized by the line-item budgeting approach. It is best suited for the control and monitoring functions of a budget.
Efficiency focuses on the process of the system or program and its conversion of inputs into outputs. Its focus on the process makes this value appropriate for performance budgets and most in-line with management and steering functions.
Efficacy focuses on outputs and outcomes, measuring the impact of policy. This value follows both the program budget and PPBS budget approaches and coincides with the planning and strategic brokering functions.
Six steps of the budgetary process; ''simplified''
Typically, the budget cycles occurs in four phases. The first requires policy planning and resource analysis and includes revenue estimation. The second phase is referred to as policy formulation and includes the negotiation and planning of the budget formation. The third phase is policy execution which follows budget adoption is budget execution—the implementation and revision of budgeted policy. The fourth phase encompasses the entire budget process, but is considered its fourth phase. This phase is auditing and evaluating the entire process and system. See the associated points below:- Revenue Estimation performed in the executive branch by the finance director, clerk's office, budget director, manager, or a team.
- Budget Call issued to outline the presentation form, recommend certain goals.
- Budget Formulation reflecting on the past, set goals for the future and reconcile the difference.
- Budget Hearings can include departments, sections, the executive, and the public to discuss changes in the budget.
- Budget Adoption final approval by the legislative body.
- Budget Execution amending the budget as the fiscal year progresses.
Types of public budgets
- Operating budgets are those documents that describe the expenditures and revenues during a given period for the functioning of an organization.
- Capital budgeting is the process of planning for future purchases above a certain cost threshold or extended life span. This budget is typically accompanied by a capital improvement plan that describes a timeline for acquisition and payment of debt.