Public budgeting is a field of public administration and a discipline in the academic study of public administration. Budgeting is characterized by its approaches, functions, formation, and type.
Authors Robert W. Smith and Thomas D. Lynch describe public budgeting through four perspectives: incrementalism, comprehensive planning, decision-making, and managerial. 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's 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.Public budgeting refers to the process of allocating and managing public funds, typically by a government or other public organization. It involves setting priorities, estimating revenue, determining spending levels, and monitoring the use of funds.
Differences between public and private budgeting Resource Management:
Resource management is an important aspect of public budgeting, as it involves the allocation, utilization, and monitoring of financial, human, and other resources. Some key considerations in resource management of public budgeting include: prioritisation, efficiency, accountability, transparency, flexibility. Public budgets are of a greater size, however, the responsibility for them is assigned to relatively small number of executive representatives. Authors Robert D. Lee. Jr. et al. argue that governments do not use all available resources, even though this has been violated in the United States during times of major crises such as World War II. On the other hand, they suggests that during times unaffected by the crisis most of the Gross domestic product is managed by the private sector. Governments have almost unlimited power to decide how much money will be used for public purposes, whereas private sector is reliable on their ability to sell their product on the market.
Profit Motive:
Private sector motivation is driven by maximisation of profit. It is a form of evaluating success of the private subject. The success of government cannot be measured in terms of profit because most of the activities managed by the government are unprofitable. Although, there are some government activities that yield profit which cannot be always measured in terms of money, even though we realize there is an existing benefit to such programs. Authors Robert D. Lee. Jr. et al. provide an example of cancer research. It obviously yields great returns which cannot be directly measured in terms of money, although future earnings can be estimated according to the value of life. That is why more abstract terms of measuring results of governmental activities are preferable.
Role of public budgeting Public budgeting aims to allocate and manage government resources in a manner that maximizes their effectiveness and efficiency to attain public objectives and advance the welfare of the community. Furthermore, it also fosters accountability, transparency, and public participation in the budget process to ensure that government decisions align with public priorities and expectations.
Public Goods Authors Robert D. Lee. Jr. et al. say that:
"Some government services yield public or collective benefits that are of value to society as a whole"
They suggest that this is the main difference from corporate products that are mostly consumed by an individual. Public goods have two main properties that indicate them. Nonexcludability: no one can be prevented from using them (for an example public lighting) Nonrivalness: consumption of the public good from one person does not affect other person's use (everyone consumes national defence in the same way and one person's consumption of national defence does not diminish its availability to others).
Public goods are also referred to as goods that cannot be provided by the market efficiently or will not be provided by the market at all. This idea was originally presented by economist Paul Samuelson in his seminal paper, "The Pure Theory of Public Expenditure," published in 1954.
Externalities It is an effect that affects people beyond those who are targets of a particular service. Externalities can be either positive or negative, depending on whether the effect is beneficial or harmful. Managing different externalities is also a domain where governments interfere.
positive externalities - occur when the consumption or production of a good or service has a beneficial effect on others, without compensation. One of the most typical examples is education. Governments provide access to some level of education regardless of their wealth. Although this service is provided to a particular person the overall effect benefits the whole society. Other examples are healthcare, and research and development. negative externalities - occur when the consumption or production of a good or service imposes costs on others, without compensation. Examples of negative externalities include pollution, noise, and traffic congestion. Some companies may pollute the environment, while they are maximizing their profit. It is the role of the government to prevent or minimize the cost arising from such actions.
Other responsibilities
Demographic changes - governments influence demographic factors through public programs by implementing policies and programs aimed at changing the population size, age structure, and geographic distribution of a country's population. For example, governments may provide incentives for families to have more children in order to increase the birth rate and promote population growth, or they may provide healthcare and education programs to improve the health and education levels of the population, which can lead to demographic changes over time. High-risk situations - governments are able to bear or regulate risks connected to activities that would not be manageable for the private sector due to their ability to raise funds through taxation or borrowing (such as space exploration). Technological change - governments can help facilitate technological change by providing infrastructure for new means of transport, such as highways or public transportation systems. They may also provide funding for research and development of new technologies, such as renewable energy or artificial intelligence, which can help to drive innovation and economic growth. Additionally, governments also regulate industries to prevent monopolies and other market instabilities.
Examples of public goods
education national defence clean air and water infrastructure (roads, bridges, telecommunication, water supply, heat, electricity, public lighting) research and development healthcare judiciary pensions
Public budget revenues Governments use public budgeting to allocate and manage the government budget in order to achieve social and economic objectives. Governments are to redistribute money in a socially beneficial way. In order to do so they need to raise the money from people in the most efficient and equitable manner or incorporate some profitable activities. However, most of the revenues are accumulated from taxes and social insurances. Finding the balance between income and expenditures is the goal in public budgeting but the specific income sources and services provided are equally important topic in the discussion about public budgeting.
The main sources of federal income in the United States are individual income tax, social insurance taxes (payroll tax for Social Security and Medicare), and the corporate income tax. These revenue streams are used to fund a wide range of public services, including national defence, social welfare programs, and public infrastructure.
The aim of the government is to minimize the dead weight loss of taxation and tax evasion. To address these issues, governments can implement measures such as simplifying the tax code, reducing tax rates, and increasing tax enforcement efforts. However, some tax costs cannot be avoided completely.
Public budget expenditures Basically, there are three main types of spendings:
Discretionary spendings - spendings that undergo an approval process which aims to modify the properties of those expenditures and can be modified every year, these can be operations of federal departments or investments in infrastructure, etc. Discretionary spendings are consisting from the half out of national defence expenses in the USA.
Mandatory spending - government is obligated to pay them according to law and they cannot be changed.
Mandatory spendings became higher overtime and are the greater part of public expenditures. Most of them are closely connected to healthcare.
Net interest - refers to the amount of money the government has to pay each year on interests on the national debt.
There has been a huge shift towards mandatory spendings as countries around the world adopted various fiscal rules to enforce sustainability and to make public budgets more predictable over time . On the other hand, this implies that governments have much less space to control the public budget. Fiscal rules can have positive or negative outcomes according to the responsibility of the government. For governments that consume rising shares of national income, these rules may prevent enormous debt of the country during their governance.
Allen Schick suggests that the developed countries have gone through three stages of public budgeting scenarios.
Balanced budget norm - governments focused on balanced budget, each year they targeted the revenue expenditure balance but did not differentiate between recession and years of economic growth, because most of the countries could not follow this norm (during times of war and economic stagnation these rules have been constantly violated), even though it served as a rigid argument for cutting expenses.
Dynamic fiscal management - after the World War II. these rules shifted towards targeting balanced budget in the time horizon of one economic cycle, in some countries this meant that spendings should not exceed the government revenue that would be accumulated at full employment, the aim was to have an approximately same real output as the potential output.
Fiscal targets - with the demand for balancing the economy rather than balancing the budget. Governments used debt with the aim to stimulate the economy, but after the oil shocks the governments could not balance out the budget by raising taxes and had to adapt much stronger cuts on expenditures. As balanced budgets are not possible during economic fluctuations, governments are now focusing on long-term prospects perceiving debts as a drag on the future economic growth.
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 (or other duly constituted agent) whose approval and authorization are necessary before the plan may be executed." ~Frederick A. Cleveland