GOVERNMENT BUDGET

a forecast of governmental expenditures and revenues for the ensuing fiscal year, which may or may not correspond to the calendar year. With the exception of primitive economies, the budget is the key instrument for the expression and execution of government economic policy. Government budgets have wide implications for the national economy. By their very nature they effect a redistribution of income; by their scale they may promote or retard economic growth in general or in certain areas of the economy. They are, therefore, political as well as economic documents and are products of the overt and covert political processes by which competing interests in any nation achieve agreement. There are various practical approaches to budgeting, including the administrative budget, which emphasizes the expenditures of ongoing government operations; the capital budget, which gives separate treatment to public-works projects and their special financing requirements; the cash budget, which simplifies budgetary procedures; the full-employment budget, which projects expenditures and revenues to produce surpluses or deficits in order, according to the Keynesian theory, to produce full employment; and the program budget, which classifies expenditures according to the items on which they will be spent. In the United States the federal budget is the responsibility of the president and is prepared by his Office of Management and Budget. Traditionally the U.S. budget deals mainly with expenditure programs, and revenues are covered only briefly. The size of the expected budget deficit or surplus is regarded as very important, particularly in its potential effect on interest rates, employment, and other factors. An important aspect of the budgetary process is the greater influence of the Congress compared with British and European legislatures. The U.S. budget is submitted in January for the fiscal year commencing in July. It is then considered in great detail by several subcommittees of the House of Representatives and to a limited degree by the Appropriations Committee of the Senate. Minor amendments to the budget are quite common, but the influence of the Congress is more significant than the amendments suggest, for often Congress has greatly influenced the scope of the budget while it was being prepared. In Great Britain the preparation of the budget is the function of the Treasury, which is headed by the chancellor of the Exchequer. It is presented to the Parliament by the chancellor, usually in the spring. Limited discussion of the budget takes place in Cabinet meetings while it is being prepared, but final details may be withheld from the full Cabinet until the budget day. The emphasis of the British budget is on taxation and the state of the economy. Estimates of expenditures in detail are published separately, either on the same day as the budget or a few weeks in advance. Parliamentary committees discuss and criticize expenditure estimates but do not have the power to amend the budget. forecast by a government of its expenditures and revenues for a specific period of time. In national finance, the period covered by a budget is usually a year, known as a financial or fiscal year, which may or may not correspond with the calendar year. The word budget is derived from the Old French bougette ("little bag"). When the British chancellor of the Exchequer makes his annual financial statement, he is said to "open" his budget, or receptacle of documents and accounts. Additional reading Studies of the governmental budget include Jesse Burkhead, Government Budgeting (1956); E.S. Kirschen et al., Economic Policy in Our Time, 3 vol. (1964); J.R. Hicks, The Social Framework: An Introduction to Economics, 4th ed. (1971); United States. Congress, Planning, Programming, Budgeting: Inquiry (1970); David J. Ott and Attiat F. Ott, Federal Budget Policy, 3rd ed. (1977); Peter C. Sarant, Zero-Based Budgeting in the Public Sector: A Pragmatic Approach (1978); and Wilfred Beckerman, An Introduction to National Income Analysis, 3rd ed. (1980). Survey of Current Business (monthy), published by the Bureau of Economic Analysis of the United States Department of Commerce, together with its supplement, The National Income and Product Accounts of the United States: Statistical Tables (irregular), provides practical analyses. The Brookings Institution annual Setting National Priorities explores U.S. budgetary developments; and the London Institute for Fiscal Studies does the same for the United Kingdom in its IFS Report Series.Components of the budget and their interrelation are explored in Richard A. Musgrave, Fiscal Systems (1969, reprinted 1981); Hugh Heclo and Aaron Wildavsky, The Private Government of Public Money, 2nd ed. (1981); Alan T. Peacock and Jack Wiseman, The Growth of Public Expenditure in the United Kingdom, 2nd rev. ed. (1967); Leo Pliatzky, Getting and Spending: Public Expenditure, Employment, and Inflation, rev. ed. (1984); Carl S. Shoup, Public Finance (1969); Harold F. Williamson (ed.), The Growth of the American Economy, 2nd ed. (1951); Alan S. Blinder et al., The Economics of Public Finance (1974); Charles L. Schultze, The Politics and Economics of Public Spending (1968); J.A. Kay and M.A. King, The British Tax System, 3rd ed. (1983); Carolyn Webber and Aaron Wildavsky, A History of Taxation and Expenditure in the Western World (1986); Mervyn A. King and Don Fullerton (eds.), The Taxation of Income from Capital: A Comparative Study in the United States, the United Kingdom, Sweden, and West Germany (1984); John F. Due and John L. Mikesell, Sales Taxation: State and Local Structure and Administration (1983); Charles E. Walker and Mark A. Bloomfield (eds.), New Directions in Federal Tax Policy for the 1980s (1983); Mark Ashworth, John Hills, and Nick Morris, Public Finances in Perspective (1984); Henry C. Adams, Public Debts: An Essay in the Science of Finance (1887, reprinted 1975); John Maynard Keynes, How to Pay for the War (1940); Tilford C. Gaines, Techniques of Treasury Debt Management (1962); Warren L. Smith, Debt Management in the United States (1960); Edward Nevin, The Problem of the National Debt (1954); Henry C. Murphy, The National Debt in War and Transition (1950); A. James Heins, Constitutional Restrictions Against State Debt (1963); James M. Buchanan, Public Principles of Public Debt (1958); and James M. Ferguson (ed.), Public Debt and Future Generations (1964, reprinted 1982).The budgetary process at both national and local levels is discussed in Richard A. Musgrave and Peggy B. Musgrave, Public Finance in Theory and Practice, 4th ed. (1984); Arthur Smithies, The Budgetary Process in the United States (1955); Aaron Wildavsky, The Politics of the Budgetary Process, 4th ed. (1984); Sir Herbert Brittain, The British Budgetary System (1959); Samuel Brittan, Steering the Economy: The British Experiment (1971); R.W. Davies, The Development of the Soviet Budgetary System (1958, reprinted 1979); David Novick (ed.), Program Budgeting: Program Analysis and the Federal Budget, 2nd ed. (1969); Richard A. Musgrave (ed.), Essays in Fiscal Federalism (1965, reprinted 1977); Wallace E. Oates, Fiscal Federalism (1972); C.D. Foster, R.A. Jackman, and M. Perlman, Local Government Finance in a Unitary State (1980); and J. Richard Aronson and John Hilley, Financing State and Local Governments, 4th ed. (1986). Kenyon Edwards Poole John F. Due Assar Lindbeck Charles Nicholas Morris The Editors of the Encyclopdia Britannica Components of the budget In the United States the budget for each fiscal year contains detailed information on the outlays intended by the federal government and the receipts expected, including those from trust funds. The budget also divides authorized expenditure into that which can be carried out without action by Congress and that which requires further authorization. In any year, about half of federal expenditure requires authorization from Congress; by witholding this authorization, Congress is able to force changes in the government's budgetary policy. The budget also summarizes the outstanding debt of the federal government and estimates the size of the surplus or deficit expected on the basis of the revenue and expenditure projected in the budget. The U.S. budget is presented as a coherent whole for lengthy consideration by Congress, during which time it is often substantially revised. This joint consideration of revenue and expenditure is also common in most European countries. Practice in the United Kingdom, and in other countries with a British parliamentary tradition, continues to reflect the historical separation of revenue and expenditure. The U.K. budget consists of a number of different documents, with only limited attempts being made to relate one to another. A sketchy report of the government's intentions is given in an Autumn Statement, usually published in November, and detailed expenditure plans are provided in February or March in a White Paper. The U.K. budget, usually presented in March, is mainly concerned with taxation and is represented in a separate volume entitled Financial Statement and Budget Report. This gives a general outline of budgetary strategy, details of proposed tax changes, and estimates of likely revenues, as well as details of such items as capital receipts from asset sales and the size of the contingency reserve of unallocated money to cover unforeseen events. Partly because of this fragmentation of the U.K. budget, and the difficulty of relating the public expenditure White Paper to the Financial Statement and Budget Report, debate is limited, and it is rare for any detail to be changed after the documents are published. The fragmentation of the budget is exacerbated further by the presentation of details of social security expenditure in yet another document. Expenditure Composition of public expenditure Expenditures authorized under a national budget are divided into two main categories. The first is the government purchase of goods and services in order to provide services such as education, health care, or defense. The second is the payment of social security and other transfers to individuals and the payment of subsidies to industrial and commercial companies. Both types are usually labeled "public expenditure," and in many countries attention usually focuses on the aggregate of the two. This obscures important differences in the economic significance of the two items, however. The first represents the public sector's claim on total national resources; the second the scale of its redistribution within the private sector. In most Western countries, the share of the public sector in total economic activity averages between 20 and 30 percent. This reflects the proportion of workers who are employed in the public sector or in publicly financed activities, the proportion of national output generated there, and the proportion of incomes derived for productive services that is earned by public sector employees. Some of these activities yield commercial revenues-the postal service, for example. Most have to be financed by taxation. In addition, the government raises taxation in order to redistribute income within the private sector of the economy. It taxes some activities and subsidizes others-through investment credits, for example. On a larger scale, it uses the benefit and social security system to make payments to needy individuals and raises taxes in order to subsidize those who warrant it. With this redistributive activity, plus the direct government productive activity financed from legislation, the total share of incomes taken in taxation is higher than the share of government in total production. It averages around 40 percent in Western economies. In addition to direct expenditures, attention has been drawn to "tax expenditures." If the government favours a particular activity-such as investment-grants or tax concessions may be awarded to that activity. The two procedures have much the same effect on investment and on government revenues, but one appears to raise public expenditure and the other to reduce taxation. It has been suggested that these tax expenditures-tax reductions motivated by an economic or social objective-should be the subject of a tax expenditure budget similar to the public expenditure budget, and several countries have now moved in that direction. For all private and public purposes within the economy, the scale of public activity is best measured as a proportion of national income: the total of incomes generated or (equivalently) of expenditures on goods and services. The overall proportion of national income that is collected in taxes, raised from profits on government activities, or borrowed varies widely in the developed nations. This variation reflects different national decisions concerning the proportion of a nation's activity deemed most appropriate to have carried out by the various levels of government or by government agencies. Much of the variation occurs because of choices over the provision of health care (mostly public in the United Kingdom, mostly private in the United States) and over the level and importance of transfer payments. By the late 20th century the share of national income devoted to public expenditure varied from almost 60 percent in countries such as Denmark, Sweden, and The Netherlands to about 30 percent in Australia, the United States, Japan, and Greece. The United Kingdom, Italy, France, and Germany all devote between 40 and 50 percent of their national incomes to public spending. Expenditures on transfers also vary widely, depending partly on how redistributive the government wishes to be, partly on how much of this redistribution is carried out through the tax system, and partly on factors such as the number of old people and the level of unemployment. The dominant payment in every country is for old-age pensions, and the amount depends on how well-developed private sector pensions are. Another factor is the extent to which the government chooses to use direct subsidies rather than tax concessions to stimulate the economy. In the United States in the late 20th century, between 25 and 30 percent of the federal budget was being spent on defense and a similar amount on social security and Medicare payments. Only a fairly small proportion of the federal budget was spent on other items, with about 10 percent of the overall budget being devoted to the salaries and other remuneration of federal civilian employees. Most other provision of public services-education, roads, welfare, public health, hospitals, police, sanitation-were provided by state and local governments, which spent about three times as much as the federal government on the provision of civilian services. Both levels of government in the United States raise taxes from a variety of sources. The relative importance of state, local, and federal expenditure on civil functions has varied considerably, with the role of the federal government being greatest before World War II and declining after the war. In Europe public expenditure was both larger (as a share of national income) and more centralized during this same time. The United Kingdom, for example, devoted about 12 percent of national income to centrally funded social security programs; 5 percent each to defense, the health service, and education; and smaller amounts to industrial support, law and order, and subsidies of various kinds. Although most revenue is raised centrally in the United Kingdom, administration of many programs is carried out at local levels, partly financed by a local property tax and partly through grants from the central government. Local authorities are usually regarded as separate decision-making units, but the role of central government as a provider of finance that sets rules and imposes penalties has become dominant. The budgetary process The budgetary process is the means by which the executive and legislative branches together formulate a coherent set of taxing and spending proposals. The mechanics of this process, and the relative roles of the two parts of government, differ considerably among countries. Government versus private sector budgeting Although the process of preparing and discussing a national budget has progressed considerably during the 20th century, it is in a number of senses still inferior to the way budgeting is carried out by private sector companies or indeed by individuals. Commercial practice is governed by a series of well-defined rules, and firms are required to produce a balance sheet, a profit and loss account, and to monitor their cash flow carefully. The total indebtedness of a company is monitored closely by its shareholders, who are also critical of future forecasts of profits and growth. Individuals who fail to budget adequately are equally closely monitored by bank managers and credit agencies, and those with complicated affairs can draw upon skilled professional help. The accountability of government, even in a well-developed democracy, is in reality considerably less acute, or certainly less clear, than that of companies to their shareholders or individuals to their various creditors. As a result, governmental budgeting is frequently of lower quality than is the norm in the private sector. Forecasts of receipts and expenditures are often wildly at variance with reality; changes to accounting practices are sometimes made for cosmetic political purposes; and certain distinctions, such as those between capital and current expenditures, are frequently blurred deliberately. These criticisms of the national budgetary process are more valid in some countries than in others. The extent of scrutiny of the national budget varies widely, and governments vary in how ready they are to provide relevant information and to what degree they try to obscure features of the budget by complicated and disjointed presentation. The United States has a relatively open budget, which is presented as a whole and subjected to congressional scrutiny. In contrast, the government of the United Kingdom presents the budget in different documents at different times, and, although subject to parliamentary scrutiny, it is rarely changed.