The Policy Process and Budgeting

Setting Priorities, Funding Programs

Overview

What are the six major steps in the policy process?

What are the key steps in creating a budget and who are the key actors at each step?

How does the budget fit with our overall economic policy?

Public Policy

The decisions, rules, and actions of the government that are designed to achieve certain goals

Policy constrained by– Political forces– Budget

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

The Policy Process

Policy Deliberation

Policy Enactment

Policy Implementation

Agenda Setting

Policy Outcomes Policy Output

Budget and Economic Policy

Policy process constrained by budget Budget constrained by economic policy

Setting the Budget

Revenue

Revenue Sources (FY2004)

Setting the Budget

Revenue Expenditures

– Direct spending– Discretionary spending

Government Expenditures (FY2004)

Setting the Budget

Revenue Expenditures

– Direct spending– Discretionary spending

Revenue – Expenditures– Surplus– Deficit

Budget Surplus/Deficit

National Debt

The Federal Budget Process

President’s Budget Request Congressional Budget Resolution

President’s Budget Request

Federal agencies submit requests to Office of Management and Budget (OMB)– 18 month lead time– Summer of 2005, agencies submitting requests for

budget that will go into effect October 1, 2006

OMB – Proposed budget to Congress– Due by first Monday in February

Congress’s Job

Congressional Budget Office report– CBO makes economic forecast to predict revenues– February 15

Individual committees make requests to Budget Committees– Mid- to late March

Congress’s Job

House and Senate Budget Committees draft “Budget Resolution”– What is a “budget resolution”?

How much money will govt. collect in taxes over next 5 years?

How much money will govt. spend in each of 20 spending categories (“budget functions”)?

– President’s signature not needed– Supposed to be done by April 15

Congress’s Job

President’s Budget

CBO Projections

Committee Requests

Budget Committees’ Budget Resolution

Appropriations Committee

Appropriations Committee

Appropriations Committee

Congress’s Job

Appropriations Committees– House and Senate– Dollars for programs– Constrained by Budget Resolution– President’s signature required on appropriations

Budget Deadline: September 30

Miss the deadline?– Federal government runs out of “money” on October

1– Congress must pass a “continuing resolution” to

prevent the government from shutting down

What Do We Take Away?

Process is very long But, there is a deadline – decisions under

pressure Many, many people involved – too many

cooks?

Constraints on Budget Process

Political constraints (which programs are popular, etc.)

Macroeconomic constraints– To the extent that the government affects the

economy, we need our budget (taxing and spending) to reflect broader economic policy.

Economic Policy Overview

Why is government involved in the economy? To what extent should government be involved

in the economy? What tools can the government use to control

the economy?

Why Is Government Involved in the Economy?

Basic government function– Define and protect property rights– Maintain the peace

Public expectations (post-Great Depression) Market failures

– Monopolies– Public goods

Should the Government Be Involved And, If So, How Much?

Beliefs about the proper level of government involvement depend on beliefs about how the economy works

Three key theories– Laissez-faire capitalism– Keynesianism– Monetarism

Laissez-faire Capitalism

Based on Adam Smith’s “invisible hand” Market will work, just leave it alone Advocates minimal government involvement Focus is on overall productivity, not inequalities Was popular pre-Great Depression Regaining popularity since 1970s

Keynesianism

Based on work of John Maynard Keynes Economy can be “revived” through government

intervention Gross inequalities in wealth reduce demand for goods

and hurt economy So goal is to make sure that the middle class and

working poor have money to spend– Cut income taxes on this broad segment of society– Create jobs through public employment

Monetarism

Key player: Milton Friedman Government cannot act quickly enough to “fine-tune”

economy Instead, should focus on stability in economy by

controlling the money supply to banks Became popular in late 1970s Practically, emphasis is on controlling interest rates Gives the Chair of the Federal Reserve enormous

power

Ben Bernanke – Chair of the Federal Reserve Chair

Comparison of the “Big Three”

Laissez-faire Capitalism

Keynesianism Monetarism

Primary Concern

Economic Growth

Economic Equality

Economic Stability

Govt. Role Minimal Major Moderate

Govt. “Tools”

None Tax rates, government spending

Control money and interest rates

What Policies Can Govt. Use to Control Economy?

Monetary policies Fiscal policies Regulation Subsidies and Contracting

Monetary Policies

Set interest rates Control banking regulations (affects how much

money banks have to “play with” and lend to consumers)

Fiscal Policies

Tax– Tax rates determine how much money government

has and, conversely, how much money consumers have to spend

– Progressive v. Regressive tax schemes– Progressive taxes help redistribute wealth

Spend– Can create jobs– Affect overall health of economy

Regulation

Break up monopolies (antitrust policy) Set minimum wages and work hour limits Child labor laws Safety and health requirements

Subsidies and Contracting

Get people to do things they wouldn’t otherwise do by offering benefits for the behavior

Subsidies (grants of cash and goods to firms or people doing things we like)

– Examples: NSF grants, crop subsidies, land grants to “settlers” in 1800s

Contracts (opportunities for firms to do business with the government – can impose conditions!)

– Examples: providing contracts to new industries to help them develop, requiring firms who contract w/ govt. to engage in fair employment practices