Budgeting Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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The term budgeting refers to the process of allocating financial resources to serve public purposes. A government’s budget is essentially a summary statement of all planned revenues and expenditures for the coming fiscal cycle. This statement enables the bureaucracy to collect and spend money. This br ief definition alludes to two fields of research on public budgeting: political science and public administration.

Political science is interested in budgeting because a budget is a fundamental output of political systems and serves as a key indicator of governments’ public policy commitments. Because the process of budgeting entails taking away money from some segments of society (taxation) and giving it to others (expenditures), budgets are contentious and the result of an often hard-fought political process. Broadly speaking, political scientists contend that the outcome of the budget process is determined by the choices of political actors involved in budgeting as well as the formal and informal rules governing the decision-making process.

In political science, the substantive focus of the vast literature concentrates on three major topics: (1) the size of the budget, especially in relation to the overall size of the economy (i.e., government expenditures as percentage of gross domestic product); (2) the balance of the budget: planned revenues (mostly originating from taxation) minus expenditures; and (3) the composition of public budgets: spending across governmental functions such as defense, social security, and health care.

Similarly, the field of public administration is fascinated by budgeting because of the formidable and complex task to formulate, implement, and monitor the execution of a budget. The technical process of administering a budget entails forecasting, accounting, reporting, and auditing of revenue and expenditures streams. The organization of budgeting is characterized by tremendously diverse and specialized programs and structures, as well as high technical demands. As a consequence of an interest in the technical aspects of budgeting, public administration generally focuses on specific budgeting systems or detailed budgeting problems. Public administration lags somewhat behind political science in developing a comparative and generalized theoretical framework of budgeting.

The public administration literature on public budgeting concentrates on two major research topics: (1) policy analysis and (2) the study of institutional arrangements that provide public services. Consequently, a substantial part of this literature attempts to fuse both topics and is concerned with devising appropriate and efficient budgetary systems. In the past decades, some of the major budgetary systems can be classified under the following labels: program-based budgeting, zero-based budgeting, and, more recently, performance-based budgeting, which attempts to bring businesslike practices, such as accrual budgeting, to public management. Moreover, a vast empirical literature, mostly generated by economists, is devoted to revenue forecasting; that is, the attempt to predict future revenues by identifying the consequences of future macroeconomic developments under existing laws (taxation). Forecasting serves as a tool for medium-term and long-term planning.

Because scholarly work on budgeting in political science and public administration overlap less and less, this entry concentrates on outlining core conceptual aspects and theoretical advances on the politics of budgeting. The main focus, as in much of the classic work on budgeting, is on the politics of public spending. Studies of the politics of budgeting move beyond a simple vision of budgeting as devising a document on how to collect and spend citizens’ monies and instead recognizes that budgeting is a political endeavor. Budgeting is the allocation of a scarce resource—money. This process demands trade-offs among competing policy alternatives and political interests. The outcome of these trade-offs is a manifestation of a government’s policy priorities, as well as a reflection of power among individual budget actors. Money spent according to the budget holds two broad societal consequences: It allows citizens to observe whether their preferences are fulfilled (accountability), and it fuels the economy. Given these features of budgeting, political scientists are interested in the decision-making process—the rules for confrontation and compromise—and in the actors who determine budget outcomes.

Terminology

In general, a government’s commitment to spend monies is outlined regularly (often annually) in one or a series of laws. While there is some variation on the exact terminology across countries, this commitment is a government output and called appropriations. For the United States, researchers also refer to budget authority—that is the authority granted per congressional vote and presidential approval to an agent of government to spend money. Once these commitments are honored and the money is actually spent, we speak of outlays or expenditures (i.e., outcomes). In general, fiscal policy, deficits, and surpluses are captured by expenditures.

Some governments separate their current operations and capital expenditures. A core function of this division is to identify how borrowing or current account surpluses are translated into investments in capital assets, such as physical infrastructure. By doing so, governments can show that public spending moves beyond simple consumption. While advocates of capital budgeting claim that this process encourages long-term planning, critics argue that capital budgets misstate governments’ financial positions. Many developing countries and most American states employ capital budgeting. However, in practice, there is large variation on how the capital and operating budgets are related to each other.

Three more distinctions are noteworthy. Within a budget, one can draw a distinction between entitlements and discretionary spending. Based on authorizing legislation, entitlements mandate payments, often to eligible individuals, by an agency. Thus, outlays depend on exogenous circumstances, such as economic well-being, and are independent of the amount appropriated to a program in the previous budget. For example, unemployment benefits comprise of a series of set eligibility requirements, but the economic climate and the number of people claiming benefits determine the actual withdrawal of financial resources. As a consequence for budgeting, entitlement spending needs to be forecast for the coming fiscal year by government agencies. Moreover, an effective change in entitlement spending is not pursued in the budget itself but in separate legislation modifying existing eligibility requirements. In contrast to entitlements, discretionary spending is public expenditure over which budget makers decide by reoccurring (mostly annual) appropriations.

Second, a government’s budget may be delineated along organizational units, such as ministries and departments, or across programmatic functions. Budget items are grouped programmatically when they are identified by government activities in relation to a specific set of policy objectives. Proper classification can be tricky. For example, should a nursing school operated by a public hospital be classified under health or education? To overcome these problems and generate internationally comparable standards, the United Nations, in corporation with the International Monetary Fund, the Organization for Economic Cooperation and Development, and the World Bank, developed a conceptual structure, the System of National Accounts, in 1993 to provide international standards for the measurement of the market economy. Specifically for budgets, classification of the functions of government (COFOG) categorizes activities according to socioeconomic objectives, such as defense, health, and public order.

Finally, an increasing number of countries, especially developed ones, have moved from cash-based budgeting to accrual accounting since the 1990s. Under the cash basis, a transaction is recorded at the time the payment or receipt occurs. Accrual accounting, on the other hand, records a transaction when an action producing revenues or spending takes place and not when this action is paid for. In short, accrual accounting records change in ownership, while cash-based budgeting tracks exchange of monies. Clearly, for large-scale governmental infrastructure projects, the time difference between both occurrences might be large, thus making a comparison between cash and accrual-based, or even mixed budgets, challenging.

Politics Of Budgeting

In his famous call for a theory on government resource allocation, V. O. Key (1940) asked why government should allocate a certain amount of money to a specific government function over all others. While the normative element of this question was initially addressed by economists based on the principles of efficiency and equity—e.g., Paul Samuelson (1954)—a seminal theoretical response by a political scientist was Aaron Wildavsky’s (1964) The Politics of the Budgetary Process.

Wildavsky argued that budgets and the programs within it change only incrementally over time. Instrumentalism holds that budget makers respond to the remarkable complexity of distributing the shares of a budget across programs by making small corrections to the status quo. Given the financial, temporal, and cognitive constraints on bureaucrats and policy makers, the budgetary decision-making process is simplified by the concepts of base and fair share. Base essentials mean that previous allocation to a program are expected to be matched in the current year. Fair share denotes the idea that new funding should be distributed roughly equally across agencies and programs. In short, the current budget is largely determined by last year’s size and content.

Incrementalism conceptualizes budgeting as a negotiation process among a regular set of political actors including bureaucrats, as well as policy makers from the executive and legislative branches. While entitlements and budget rules may contribute to incremental changes in budgets, bargaining within the expectations of base and fair share among political actors is identified as the key feature for composing a new budget. Because incrementalism builds on decision-making theory, the budgeting process is perceived as open, pluralist, and conflict-free.

Incrementalism has been challenged on empirical and theoretical grounds since the mid-1970s. First, scholars charged that incrementalism is too conceptually vague and too descriptive for providing insightful theoretical contributions. Second, scholars also discovered that large differences in the magnitude of budget changes at both the programmatic and the overall budget level occur. Some budgets rise and fall dramatically. Incrementalism cannot account for the empirical reality of large-scale changes in budgets.

Among the first to theorize on the occurrence of both incremental and nonincremental change was John Padgett (1980). He argued that budget decisions are made serially. Decision makers engage in an ordered search through a limited set of alternatives. They inquire sequentially through different budget options until they can match a solution reflecting both the merits of a program and the perception of the overall fiscal climate. In aggregate, his decision-making model suggests that most programs only change marginally in any given year, but on some occasions, policy makers radically alter the size of a program.

In public policy, Bryan Jones and Frank Baumgartner (2005) contend that incrementalism is one element of a more comprehensive model of budgeting based on punctuated equilibrium theory. Their core argument is that individuals as well as organizations possess a limited capacity to process information. As a consequence, policy makers only concentrate on and prioritize a small set of budgetary issues. Budget issues that receive disproportionate attention change dramatically because policy makers are prone to under and over-respond to changes in the exogenous environment. Those unattended budget items, however, remain largely unchanged. Overall, their model predicts that budgetary changes are characterized by periods of stability that are occasionally interrupted by large-scale shifts in resources. In short, the punctuated equilibrium model of Baumgartner and Jones combines incrementalism and dramatic changes under a unified model of budgetary choice.

This model originated from insights on the American political system. Several other studies across a variety of advanced democracies and levels of government find strong empirical evidence that budgeting at the subnational and national level is predominantly highly incremental but sometimes interrupted by very large and often consequential budgetary changes. Jones and colleagues (2009) assess the accumulated evidence across several advanced industrialized democracies and assert that the punctuated nature of budgetary changes offers a strong empirical generalization. Taken together, these empirical verifications of the punctuated equilibrium model indicate the need for theorizing on processes generating extreme change in budgeting research.

A third approach studying the politics of budgeting emerges out of comparative political economy and rational choice institutionalism during the 1990s. The main focus of this literature is on budget balance, while incrementalism and public policy theories concentrate on spending patterns. Comparative political economists aim to identify rules generating balanced budgets and conceive budgeting along two problems: principal-agent and common-pool. In both cases, the literature identifies the self-interest of policy makers as the core problem of efficient and effective budgeting.

In the principal-agent framework, citizens (principal) delegate the authority to tax and spend to politicians (agent) and, after making their spending decisions, politicians (principal) delegate the implementation to bureaucrats (agent). In both principal-agent relationships (citizen-politician and politician bureaucrat), the literature assumes that the preferences between principal and agent do not overlap. For example, voters may prefer more education spending while politicians and bureaucrats would rather spend money on nice offices. Principal agent problems thus may lead to inefficient budgeting and more public spending.

In the common-pool resource problem, the common resource (money) is generated by general taxation of all citizens. However, policy makers are assumed to spend this money on specific purposes without regard to the depletion of the overall budget. For example, agricultural ministers are said to obtain and distribute as many agricultural subsidies as possible without considering the overall shape of the budget. Theoretically, the common-pool framework predicts that the aggregation of all individual excessive spending decisions lead to large government budgets, deficits, and debt increases.

The political economy literature on budgeting argues that both problems—principal-agent and common-pool—can be alleviated by constructing the appropriate fiscal rules and political institutions. Jürgen Von Hagen (2006) outlines three sets of rules: legislative and constitutional constraints on budgetary aggregates, political institutions fostering accountability, and procedural rules of the budgeting process.

Legislative and constitutional constraints on budgetary aggregates entail balanced budget constraints, debt and deficit limits, as well as taxation and spending restrictions. Large variation in the specifics and enforceability of these rules prevail across countries and subnational entities. While rare at the national level, among the most prominent and widely studied restrictions are those imposed by the European Monetary Union and American states. The empirical evidence on the effectiveness of these rules, however, is weak.

A significant amount of scholarly work considers the impact of political institutions, most prominently certain electoral rules of a political system, as a key influence on budgeting. This line of inquiry suggests that political competition and accountability allow voters to resolve the principal-agent problem of budgeting. When elections are competitive and personal, voters are able easily to identify and punish politicians and political parties who diverge from citizens’ preferences. There is a lively theoretical and empirical debate on other consequences of electoral rules. To a large extent, the discourse concentrates on the distinction between majoritarian and proportional electoral systems.

Procedural rules of the budget process lay out the interactions within and between the legislative and executive branches of government. Budgeting generally proceeds along a tight time schedule of formulation, enactment, execution, and assessment (the budget cycle). With some exceptions (most notably the United States), the executive branch dominates all four stages of the budget process and often manages the process within its hierarchical structures. In presidential systems, as well as multiparty collation governments, budgets also are formulated and enacted either via negotiation or by reliance on established contracts, such as coalition agreements. Overall, the process of budgeting might be fairly fragmented, specialized, and opaque to the outside observer. It is a common call in the literature, as well as among international organizations, to make the budgeting process more transparent.

Taken together, the political economy literature on budgeting proposes the following institutional solutions to the principal-agent problem: increase the accountability of the agents and increase the transparency of the budget process. Greater accountability might be achieved through electoral institutions that bring candidates closer to voters or by policy makers screening viable candidates for the top bureaucratic positions. How well these solutions works is still in debate. This is partly due to the fact that cross-national data on budget procedures and practices has been collected systematically only since the 1990s and for only a small group of countries.

Three solutions are delineated for the common-pool problem. First, a strong finance minister might be able to check excessive spending. Attributes of a strong finance minister include possessing the ability to propose a budget, being chief negotiator with individual spending ministers, and being able to unilaterally cut individual spending items. Second, a fiscal contract outlining targets might limit individual overindulgence. Third, a budget process that requires first settlement on overall spending and then considers the distribution of funds might limit government spending. While empirical evidence for advanced democracies is mixed so far, recent observations suggest that an increasing number of countries strengthened the role of the finance minister in the budget process.

Discussion

It is helpful to contrast the three approaches to the study of budgeting—incrementalism, punctuated equilibrium, and political economy—in regard to their conception of actors, choice, and institutions. All three approaches ask how political actors engage with each other in various institutional settings in order to decide on a budget. Substantively, the first two approaches concentrate on appropriations, while political economy is more interested in outlays and deficits.

Theoretical approaches to budgeting based on political economy clearly name the actors in the budgeting process. Most commonly, a game theoretical model identifies an interaction between a pair of the following actors: voters, government, spending ministers, and the bureaucracy. In contrast, incrementalism and punctuated equilibrium scholarship relies on the amorphous group known as policy makers or focuses on the executive organization. The last two approaches often understand budgeting as a fairly open process with different actors providing diverse inputs at the various stages of the process. As a consequence of each approach, political economy might miss important actors in the budgeting process due to its restrictive assumptions, while the other two approaches’ vagueness might hinder developing generalizable insights.

Political science’s theoretical development in budgeting research is accommodated by two models of individual choice. Political economy relies on the postulates of rational choice theory and assigns preferences and expected utilities to individual budgeting actors. In contrast, incrementalism and punctuated equilibrium develop within bounded rationality and contend that, in budgeting, imperfect decision-making conditions produce imperfect solution searches and foster a reliance on temporally available heuristics. While its simplicity and the ability to generalize self-interested strategic behavior allow the political economy approach to develop a unified body of research, bounded rationality more accurately reflects on choices and actions of the actors in the budgeting process.

Finally, all three approaches also vary in their assessment of political institutions. The political economy approach attributes core causal effects to the macro-institutional setting, such as the system of government and electoral system. However, this approach is rightfully concerned with the possible endogenity of institutions: governments can choose both budgets and the fiscal rules that outline the budgeting process. Incrementalism and punctuated equilibrium theories follow detailed fiscal rules more closely and often perceive institutions as part of the organizational features of the budgeting process. In all of the research on budgeting, political scientists and public administration scholars are searching for a budget process that produces efficient allocation and fair political representation.

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