PAD 4003 lecture 9

Page 1 of 13

University of North Florida

Department of Political Science

PAD 4003 Public Administration

Fall 2016

Managing finances

Public Administrator of the Week

Photo credit

John Maynard Keynes

Intellectual loadstone of ReaganBushObamanomics *

Lecture goals: Provide an overview of public budgeting and finance.

*

Some basic points:

The Constitution -- gives the responsibility for a budget to Congress (Article I, Section 7):

“All bills for raising Revenue shall originate in the House of Representatives; but the Senate

may propose or concur with Amendments as on other Bills. Every Bill which shall have

passed the House of Representatives and the Senate, shall, before it become a Law, be

presented to the President of the United States; If he approve he shall sign it, but if not he

shall return it, with his Objections to that House in which it shall have originated, who shall

enter the Objections at large on their Journal, and proceed to reconsider it. If after such

Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together

with the Objections, to the other House, by which it shall likewise be reconsidered, and if

approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes

of both Houses shall be determined by Yeas and Nays, and the Names of the Persons voting

for and against the Bill shall be entered on the Journal of each House respectively. If any Bill

shall not be returned by the President within ten Days (Sundays excepted) after it shall have

been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless

the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.”

The practice – Despite the Constitution, America has evolved a practice whereby the executive

(i.e, President, Governor, Mayor) indicates to the legislature what resources are needed to

execute public policy. Hence the President’s Budget, such as the Obama administration’s 2017

budget, as well as online copies of past budgets from as far back as 1996.

US public revenue compared – as we have seen, among the 15-20 rich nations of the world

(Western Europe, Canada, Japan, Australia, New Zealand, etc.), the US ranks very low in terms

PAD 4003 lecture 9

Page 2 of 13

of total tax revenue (click here). As indicated in Table 1, lecture 1, and Table 2, lecture 2, the US

is comparatively under-taxed.

US public expenditure compared -- again among rich countries in the world, the US ranks

relatively low in terms of total government expenditure (click here).

Budgets = values, as much as numbers. This is from a former governor of Vermont:

After a month, I learned to read budget numbers like words and find meaning between the

lines. I compared the budget book to abstract art: the longer you looked at it, the more you

could see... It was a highly subjective document, hammered together by hundreds of hands,

both public and private, each with an imprint of personal preference and public

obligation. There was a truth hidden here, but rather than being sharp, it was dull. If read

correctly, this gray columned document revealed an infinitesimal detail the cumulative values

of its many authors, as well as the labyrinth structure of state government itself. (Kunin

1994)

Her point: you'd think something like budgeting, which is so amenable to quantification, would

be fairly clear. Not so! Indeed, budgets are about more than money:

Budgets are beyond dollars. They are choices, policies, and philosophies. (Henry 2014, p.

233)

Budgets are dynamic!

A dollar in tax is a dollar not spent in personal consumption, and so either

A dollar not invested in the US, or

A dollar not invested in buying US made consumer goods, or

A dollar not invested in buying cheap junk from China.

A dollar not spent on public education will cost us in the long run, in reduced productivity

(assuming that education is underfunded).

A dollar ‘saved’ in fire and safety may result in less revenue (people and firms leave or do

not come), or higher costs elsewhere (insurance costs, etc.).

A dollar spent on repairing a road will save vehicle wear and tear costs, as well as speed up

travel times and so reduce costs elsewhere in society. Etc.

How we got here? In terms of fiscal responsibility, I am a follower of newly elected President

George W. Bush, who declared in his 27 February 2001 State of the Union address

Many of you have talked about the need to pay down our national debt. I listened, and I

agree. We owe it to our children and grandchildren to act now, and I hope you will join

me to pay down $2 trillion in debt during the next 10 years.

I agree with him. We should pay enough taxes to fund the services that we have decided that we

want to receive from government. President Bush's then budget director, a Hoosier named Mitch

Daniels, echoed this sanguine view of the prospects for the federal budget:

"The report we've issued this morning confirms that the nation has entered an era of solid

surpluses. Surpluses on the order of $160 billion, despite an economy that has been weak

now for over a year and in decline for that time. This is the second largest surplus in

American history, in the face of that weak economy, a phenomenon that should strike all

Americans as very positive" (Daniels 2001).

PAD 4003 lecture 9

Page 3 of 13

Of course, the mass murders of 11 Sep 2001 changed everything, or at least a lot. In February

2001 we had a large budget surplus, and of course we had an equally humongous tax cut, to give

the money back to those who earned it (like Paris Hilton). Well, in large part as a result of...

those humongous tax cuts,

the recession of 2001 (which started prior to 11 Sep 2001), which both depresses revenue

(less income = less tax revenue) and increases expenditure (more unemployment benefits),

but which ended by 2002,

the cost of the logically necessary war against those in Afghanistan who were behind the

aforementioned mass murders, and

the cost of the second, clearly not necessary war (according to The National Commission on

Terrorist Attacks Upon the United States, also known as the 9-11 Commission),

...we now have been running a series of humongous deficits. No long term changes have been

made to the 2000s budgetary formula.

For some perspectives on this, all from the conservative British newsmagazine The Economist

(all EBSCO links):

"Penny wise, pound foolish," (2006). The Economist, 11 Feb, p. 32.

"Student loans: Out of the mouths of babes," (2005). The Economist, 24 Dec, p. 36.

"Fiscal fantasyland," (2005). The Economist, 9 April, p. 12-13.

“A slight reprieve?” (2010). The Economist, 2 Sep.

“Why No One is Celebrating The Much-Lower Deficit,” (2014). Forbes, 15 April.

Anyhow: this is all provided as an introduction to macro-level budgeting and finance issues. To

close this introduction with an observation from an old book: budgeting is where the policy

rubber meets the road. Rhetoric is fine, but if it isn't backed with resources, nothing will

happen. As for taxes, Schiavo-Campo and McFerson put it well:

In recent years, the case for cutting taxes in the United States has rested on the statement that

the tax revenue is 'the people's money, and the people should decide how to spend it.' This

proposition is true, appealing, and meaningless. Whether for national security, social

protection, law and order, and so on, government services do not materialize out of thin air as

the result of political decrees, strong willpower, or fervent wishes... In the words of Justice

Oliver Wendell Holmes, inscribed on the front of the Internal Revenue Service headquarters

in Washington, taxes are the price we pay for a civilized society. (p. 128)

*

I. The public budget

* Cyclical versus structural economics. A common mistake being made in today’s public policy

concerns a failure to distinguish between structural and cyclical economic problems. Structural

problems concern long term problems of declining competitiveness (education, infrastructure,

research & development, environment, health, quality of life, etc.), while cyclical issues concern

deviation around that long term rate of growth. Much of what follows will be on cyclical issues.

However, our problems are probably more structural.

Budgets and fiscal policy. In addition to monitoring the use of the taxes that ‘we pay for

civilized society’1, the budget is also used as an instrument of fiscal policy, or as a tool for

1 A famous quote from Supreme Court Justice Oliver Wendell Holmes, Jr. Search the quote in the link.

PAD 4003 lecture 9

Page 4 of 13

government intervention in the economy to try to lessen the pain of short term cyclical

fluctuations. This, historically, was a ‘socialist’ (big guv'mint) concept especially popularized by

British economist John Maynard Keynes, hence references to government meddling in the

economy as 'Keynesianism'. Keynes' (1936) classic statement justifying government economic

intervention was as follows:

“The outstanding faults of the economic society in which we live are its failure to provide for

full employment and its arbitrary and inequitable distribution of wealth and incomes. The

State will have to exercise a guiding influence on the propensity to consume. Furthermore I

conceive that a somewhat comprehensive socialisation of investment will prove the only

means of securing an approximation to full employment.” (p. 378)

Keynesian fiscal policy. Keynes illustrated this through the national income equation:

Y = C + I + G + X - M

In English, it translates to:

National income (Y) = private Consumption + Investment + Government spending +

eXports – iMports

To give you some sense of

the magnitudes of these

elements of national income,

Table 1 shows the numbers

for each, as of the second

quarter of 2015. This was

Keynes’ way of showing

what contributed to national

income. His central point

was that recessions were

caused by a lack of demand,

and that an economy could be

stuck at a low level of

productivity. So if income

(economic growth) was

lagging, you could increase

consumption, increase

investment, increase government spending, increase exports, and/or decrease imports. Keynes

assessed these options as follows:

Consumption: lack of income in a recession makes this an imperfect locomotive for a

recovery: people who lack income cannot spend it.

Among those who still have money, the problem is worsened by the ‘paradox of thrift’?

Investment: in a recession there is typically unused buildings and machinery, so firms are

reluctant to invest in more.

eXports: You can't force people in other countries to buy your stuff.

iMports: You can force your citizens to buy domestic goods by prohibiting imports, but you

are likely to see an offsetting reduction in exports, as other countries retaliate in kind. Again:

no solution to recession here.

Government: The imperfect nature of the alternatives above was why Keynes advocated

government involvement. This could come in a number of forms:

Table 1

Components of US economy, 2015 Q2

Component $b C -- private consumption 12,213.9

Goods 3977.9

Services 8236.0

I -- investment (plant, equipment, buildings, etc.)

Nonresidential

Residential

3,026.3

2292.2

597.9

G -- government 3,179.2

National defense 740.1

Federal non-defense 480.6

State and local 1958.5

X -- exports 2,280.3

I -- imports -2,797.7

Y -- gross domestic product, or national income 17,902.0 Source: Bureau of Economic Analysis

PAD 4003 lecture 9

Page 5 of 13

Tax cuts: put money in the pockets of people, and they might spend it. This increases

business revenues, encouraging firms to hire people and invest.

o Yet if taxes are cut to stimulate consumer demand, people might save instead, or pay

down debt, hold cash, invest overseas, buy cheap junk from China, who knows!

o And so tax cuts for the poor are preferred, as the poor are more likely both to spend

the money, and to spend the money locally (on housing and food).

Government spending: As a result of these limitations of tax cuts, Keynes argued that

direct government spending was the best option. Government should borrow during

slowdowns (or better, spend saved surpluses) and spend to stimulate demand.

Equally important, government could spend this money on useful things: roads, dams,

universities. As a result, employers would hire workers to make the stuff government

buys, putting money in peoples' pockets, encouraging firms to invest, and so lifting the

economy out of recession.

As with any investment, productivity improvements would also make it easier to pay

back the loans when they are due.

Once the economy picked up again, government would run a surplus to pay off the debts

piled up during the recession. So the idea behind Keynesian economics was not to run up

debts. It advocated balanced budgets over the business cycle.

Think of Keynesianism as the judicious use of budgetary steroids: when the economy is flagging

a bit because of a lack of demand, you give it a boost.

Reagan administration fiscal policy

The Reaganomic logic was more of a ‘supply side’ one. The logic of supply-side economics has

its origins in ‘Say’s Law’, from the early nineteenth century French economist Jean-Baptiste

Say. Put most simply, Say’s Law has it that supply creates its own demand, so unemployment is

impossible, because the act of production creates the consumer demand for the product. Note

from the discussion of Keynesianism, above, that supply may not create its own demand: people

might save instead, or pay down debt, hold cash, invest overseas, buy cheap junk from China.

Who knows!?!?! Updated to the US: supply-side economics also argued that taxes were too high

(even though they weren’t covering expenditures), so much so that they were discouraging hard

work and investment. So one could, paradoxically, lower the tax rate, yet still yield more tax

revenue through taking a smaller slice of a bigger pie.

This is what the Reagan administration intended to do: by borrowing money to cut taxes in the

short term, in the belief that these lower taxes would pay for themselves through higher

economic activity. This did not result, and deficits grew (as we saw in Table 2, lecture 2). The

economy improved marginally (3.6% annual growth, compared to 3.0% for the previous six

years), but much of this was artificial demand, through the borrowing that funded the tax cuts.

(GW) Bush administration fiscal policy

The Bush administration logic was more classic Keynesian: government micro-management of

the economy by providing 'stimulus' through putting more money in peoples' pockets. I say

'ostensibly' because candidate Bush wanted to cut taxes back when the economy was growing

strongly and we had a debt to pay back (click here); and still wanted to keep the tax cuts after the

PAD 4003 lecture 9

Page 6 of 13

recession, even when the economy was growing strongly again, and we had both a large deficit,

and a continued large national debt (click here). Even Keynes argued that government should

practice deficit spending during recessions to stimulate the economy, but then pay back that

borrowed money (through generating surpluses, not deficits) during good times. As a result, it

all balances out.

Instead, to the extent there has been a logic to recent federal budgets, it has been a 'supply-side'

one. Supply-side economics argues that taxes are too high and so, paradoxically, if you cut tax

rates, you can yield higher total tax revenue. Sound fishy? As former President George H.W.

Bush called it: voodoo economics.

Obama administration fiscal policy

President Obama’s economics has been a more traditional form of Keynesianism. While both

Presidents Reagan and Bush borrowed to fund tax cuts that were meant to stimulate the

economy, President Obama’s ‘stimulus’ did feature some infrastructure and education spending.

By most accounts, it was about 1/3rd

tax cuts (to get Republicans on board), 1/3rd

infrastructure

and stuff like that, and 1/3rd

aid to state and local governments, both to maintain services, and to

maintain demand. For many of the reasons cited above, though, the Obama stimulus impact was

likely mixed.

Supply-side v. Keynes: what of the record?

Relevant data is presented in Table 2 on the next page, by decade and/or Presidential

administration. Some interesting points:

Tax rates dropped through the 1920s, yet economic calamity occurred nonetheless!

Note the intensity of the Great Depression, with three years (1930-2) averaging about a 9%

annual contraction in economic activity.

Only the post WWII slump of 1946 (a contraction of 11%!) compares. Other recessions:

1982: one year contraction of 1.9%,

2001: growth of 1.1% (two quarters in 2001 had contraction),

2008-9: two year contraction of 3.5%,

1930-3: four years of economic contraction totaling 29% of GDP. 29%!!!

o It is also worth noting the highest marginal tax rate column: despite raising taxes on ‘job

creators’, and an increase in government spending, the economy grew after 1929.

The federal government grew, from about 3% of GDP in 1930 to over 10% in four years.

World War II is seen as the ultimate application of Keynesian demand management, as

massive, deficit-funded government spending produced eye-watering economic growth rates.

A long, 1947-74 period of strong growth and generally balanced budgets ended in the 1970s.

Spending (size of government!) and deficits rose through the 1970s, rose more during the

Reagan years. Despite ups and downs, economic growth stayed at post-war levels (~3%). As

for why spending grew, we’ll see this in Table 4, below.

Clinton (and a Republican Congress) cooperated in spending cuts (government shrunk) and

tax/revenue increases, resulting in balanced budgets while maintaining growth.

GW Bush’s tax cuts and spending increases (government grew) returned the country to

deficits, though this time with anemic growth.

PAD 4003 lecture 9

Page 7 of 13

Table 2 – Federal spending (size of government!) in the US over time2

Year

(Presidential

budgets)

Federal

Outlays (%GDP)

Federal

revenue (% GDP)

Federal

Balance (%GDP)

GDP

change (% annual)

Jobless (%)

Highest

marginal

tax rate

1920 --- --- --- --- 73.0

1930 3.4 4.2 +0.8 -8.6 --- 25.0

1931 4.3 3.7 -0.6 -6.4 --- 25.0

1932 6.9 2.9 -4.0 -13.0 --- 63.0

1933 8.0 3.5 -4.5 -1.3 --- 63.0

1934 10.7 4.8 -5.9 10.8 --- 63.0

1935 9.2 5.2 -4.0 8.9 --- 63.0

1936 10.5 5.0 -5.5 13.0 --- 79.0

1937 8.6 6.1 -2.5 5.1 --- 79.0

1938 7.7 7.6 -0.1 -3.4 --- 79.0

1939 10.3 7.1 -3.2 8.1 --- 79.0

1943 43.6 13.3 -30.3 16.4 --- 88.0

1944 43.6 20.9 -22.7 8.1 --- 94.0

1945 41.9 20.4 -21.5 -1.1 --- 94.0

1946 24.8 17.6 -7.2 -11.0 --- 86.45

1947-1960 16.7 16.9 0.2 3.4 4.6 89.1

1961-1974 18.9 17.9 -1.0 4.0 4.9 76.0

1975-1981 21.2 18.4 -2.8 3.0 7.1 69.9

1982-1989 (Reagan) 22.3 18.1 -4.2 3.6 7.3 43.1

1990-1993 (Bush I) 21.9 17.6 -4.3 1.9 6.7 32.4

1994-2001 (Clinton) 19.4 19.3 -0.1 3.5 4.9 39.5

2002-2009 (Bush II) 20.4 17.0 -3.4 1.6 5.8 35.5 2009 24.4 14.6 -9.8 -2.8 9.3 35.0

2010 23.4 14.6 -8.7 2.5 9.6 35.0

2011 23.4 15.0 -8.5 1.6 8.9 35.0

2012 22.1 15.3 -6.8 2.2 8.1 35.0

2013 20.8 16.7 -4.1 1.5 7.4 39.6

2014 20.3 17.5 -32.8 2.4 6.2 39.6

Beyond the US time series data presented in Table 2, this trend (richer countries have larger

governments) is also evident in cross-national analysis, as shown in Figure 3 (correlation data for

this is r = .388, p = .000), on the

following page.

The figure uses final public consumption

(purchases by government agencies) as an

2 Sources:

Budget data: Office of Management and Budget, Summary of Receipts, Outlays, and Surpluses or Deficits (-) as

Percentages of GDP: 1930-2020. GDP change: Bureau of Economic Analysis, Gross Domestic Product change

from previous period. Jobless: Bureau of Labor Statistics, Employment status of the civilian noninstitutional

population, 1940 to date. Tax: Tax Policy Center, Historical Individual Income Tax Parameters.

PAD 4003 lecture 9

Page 8 of 13

indicator of the size of government and, as can be seen, richer countries have more government.

(The data, incidentally, comes from an SPSS dataset available here.) This is not to argue that

more government = a richer society. Instead an effective, honest, ‘right-sized’ government is

required. As the ultra-conservative World Bank put it in opening their 1997 World Development

Report:

“An effective state is vital for the provision of the goods and services -- and the rules and

institutions -- that allow markets to flourish and people to lead healthier, happier

lives. Without it, sustainable development, both economic and social, is impossible.” (p. 1)

Table 4 looks at

some large

components of

US federal

spending over

time. On this

data, all federal

spending growth

since the 1970s

has been in

Social Security

and especially

health care.

Conservatives on fiscal policy

Problems with Keynesian practice. Keynesian economic micro-management as practiced was

long ago challenged by many economists, and certainly by conservatives, who noted that:

Politics. Politics often dictates interventions, so the economy would be stimulated prior to an

election, rather than when the economy was slowing (a good summary).

No surpluses! Keynesianism, again, advocated balanced budgets over the business cycle!

Unfortunately, voters like the deficit spending in recessions (services for nothing!), but

balk at the tax increases required to pay back loans when the economy recovers.

Uncertainty. It is often hard to know just exactly where the economy is in the business cycle,

and so stimulus might be applied at the wrong time.

Lags. There are lags between applying the stimulus and achieving results (during which time

things might have changed).

o Displacement. It may well prove that government fiscal policy just takes money out of

private hands and puts it into public hands: so no net increase in demand. Government, after

all, has to borrow money to give it to us in tax cuts. If we (or someone in the US) loans the

money to the Feds, we lenders can't then spend it. This has been less a problem recently:

3 Sources: Historical budget data from OMB, including

Table 8.4—Outlays by Budget Enforcement Act Category as Percentages of GDP: 1962–2016

Table 15.5—Total Government Expenditures by Major Category of Expenditure as Percentages of GDP: 1948–2010

http://www.cbo.gov/budget/data/historical.pdf 4 The actual figure was about 1% higher than this, as during the Bush administration much of the funding for the

military deployments in Afghanistan and Iraq was not included in normal DoD appropriations. 5 2000-2007.

Table 4

Social services (income security) as percent of GDP3

Defense Net

interest

Social

security

Medicare Income

security

Medicaid

1950-9 ~9.4 1.4 1.1 --- ---

1960-9 9.4 1.5 2.7 --- ---

1970-9 5.8 1.6 3.8 0.9 1.4 0.4

1980-9 5.8 2.6 4.5 1.6 1.4 0.6

1990-9 4.0 3.0 4.5 2.2 1.6 1.1

2000-9 4.14

1.7 4.25

2.64

1.64

1.44

2010 4.7 1.4 4.8 3.1 n/a 1.9

PAD 4003 lecture 9

Page 9 of 13

o First, during this last recession US corporations were widely reported as holding some

$2t in cash, which, as Keynes suggested, they refused to invest (click here). Taxing this

money and putting it back into the economy would have the needed stimulatory effect.

o Second, the ‘displacement’ hypothesis assumes a closed economy, yet about 2/3 of the

recent deficit has been funded by overseas interests, in part because we haven’t been

saving enough in the Social Security Trust Fund to borrow to fund our tax cuts (source).

Ownership of "US Treasury Securities" increased by just over $1 from June 2006 (from

$8.42t) to June 2008 (to $9.49t), yet 'Foreign and International' holdings increased by

some $670b (from $1978b to $2648b). So about 2/3rd of the debt accumulated in those

last two years came from foreign borrowers. Since that time the ratio appears to have

dropped to closer to 35%. So borrowing from China avoids that displacement effect.

o The problem is long term: just as borrowing from China will stimulate the US

economy now; it will slow the US economy in 20-30 years when payments are due.

And so? This all raises the obvious question: Reagan’s tax cuts left us yawning deficits and

massive debt, and Bush’s tax cuts did the same. So what is going on here? It is likely that while

most supporters of the economics of current tax cut policies are just narrow ideologues who don't

know better; those who do know better know that the tax cuts won't work to achieve their stated

aims of stimulating the economy and reducing the deficit through growth. Instead, the purpose is

just to 'starve the beast' that is government (See Bloomberg, Forbes, and the Cato Institute).

It’s our fault. Of course, another explanation is that these people (tax cutters) are just populists

who will say what the people want to get elected. As Henry (2007) indicates:

70% of Americans are worried about the size of the accumulated debt.

o Remember: 'deficit' means we are spending more than we are taxing.

Only 35% were willing to cut government spending to fix the deficit.

Only 18% were willing to raise taxes to fix the deficit.

About 1% were willing to cut spending and raise taxes.

So at least 16% of Americans (70 - (35 + 18 + 1)) are worried about the

fact that we spend more than we tax, but are unwilling either to spend less,

tax more, or both. So we have the deficits and debt that we deserve.

Automatic stabilizers. Another important factor of the past decades has been automatic

stabilizers. This takes the guesswork out of Keynesian economic fine tuning and has an anti-

recessionary stimulus kick in automatically: unemployment benefits.

The local context. If this sort of Keynesian, ‘socialist’ government meddling in the economy

works, it only does so at the broad (national) level, not at the local level. Even at the national

level tax rebates that are spent in China will stimulate the Chinese, not American economy. This

'leakage' problem becomes more acute at the local level, as it is too easy for New Yorkers (for

instance) receiving tax cuts to spend elsewhere: New Jersey, Connecticut, online, etc.

Monetary policy. As a result of these criticisms, many conservatives advocate monetary policy,

rather than fiscal (government spending) policy. This is where the Federal Reserve comes

in. Through influencing the supply and price of money (interest rates), the same results obtained

PAD 4003 lecture 9

Page 10 of 13

by Keynesian fiscal policy are sought (PS: click the link for an explanation of why Fed

independence matters).

Low inflation. A twist in monetary policy, though, is that the primary goal is often low inflation,

rather than economic growth (and so more jobs) directly. The logic is that if one seeks to obtain

higher growth and more jobs through policies that lead to inflation, this inflation will ultimately

undermine the pro-growth policies. So one can best seek growth not through seeking growth,

but through maintaining a lid on inflation.

But not no inflation. A final twist on the inflation-targeting twist is that the target generally is not

no inflation, but rather low inflation. Low inflation is especially good as a way to reduce wage

growth. Fail to give someone a pay rise (in a period of no inflation), and they will be angry. But

give them a 1% pay rise in a period of 2% inflation, and they will happily make plans to spend

that extra money!

More budgetary context

Where the money comes from (Table 5):

Income tax -- 'progressive' (marginal

rates from 10-39.6% of one's federal

taxable income).

Corporate tax -- hard to wield in a

'globalizing' world, as firms can either shift their operations to low tax venues, or shift their

'revenues'. This is largely why corporate income taxes are relatively low (and especially low

in the US).

The US has a confusing corporate tax reality, with a higher top rate than many rich

countries, but one of the lowest overall rates of corporate taxation, once deductions are

applied and loopholes hopped through.

Worse, the deductions and loopholes are not uniformly applied, hurting some industries

and helping others.

Payroll taxes (social security, retirement) -- regressive, generally targeted (to social security,

unemployment insurance, etc.), but money is fungible!

Sales and excise tax -- regressive, applied in

myriad ways, typically by state/local

government (20% of state/local revenues).

Where the money goes: See Table 6, on the

previous page.

'Entitlements' (~60%):

Social security (20.1%), Medicare

(13.3%), Medicaid (7.6%), Interest

(6.4%).

'Discretionary'

Defense/security (~20%)

6 Given how much these items are raised so much in internet memes, it is worth noting that the budget for the

Department of Education was $687.3b, Energy was $27.2b, and ‘State and other International Programs was $42.9b

Table 5

US federal receipts, 2014

Source ($2303b) $b Percent

Individual income taxes 1395 47.4

Corporate income taxes 321 7.9

Social insurance and retirement 1020 35.5

Excise, estate and gift taxes 112 3.4 Source: Summary Tables (Budget 2016)

Table 6

US federal expenditures6, 2014

Expenditure ($3506) $b Percent National defense 596 17.1

Medicare 505 14.4

Medicaid 301 8.6

Social security 845 24.2

Other ‘mandatory’ 504 14.4

Other ‘discretionary’ 525 15.0

Net interest 229 6.5 Source: Summary Tables (Budget 2016)

PAD 4003 lecture 9

Page 11 of 13

The state and local level. First,

revenues, presented in Table 7. Major

categories are highlighted in yellow.

Next, where the money goes (Table 8).

Major categories, again, are

highlighted.

Florida low tax. State taxes in Florida

are low, on a per person basis (37th

lowest in the country). Florida also has

one of the friendliest business tax

climates (5th

lowest corporate taxes in

the country, and second best state for

business), and a low combined tax

burden (5th

lowest in the country).

See also Florida Tax Watch’s 2015

report.

Investment climate? On the other

hand, Duval County:

is the murder capital of Florida

(source),

worries about its infrastructure

stock (source and source), not

to mention the need for

massive public investment in

its port (source);

has the only West Nile virus

cases in northeast Florida

(source);

has had the country’s worst

tuberculosis outbreak in 20

years (source);

has a river that turns green

from algae blooms every summer (source);

and has relatively mediocre schools (source), and is cutting public education (source); etc.

The budget as managerial tool. The budget has become a key managerial tool, both in terms of

directing and monitoring policy. By directing I refer to the allocation of resources influencing

what takes place. By monitoring I mean that budgeting increasingly means not only the

accounting of resources coming in and going out of a cash box, but of monitoring the results of

the funded activity.

Table 7

State and local revenues, 2009

State Local

$b % $b %

Total 1496 1408 Intergovernmental 496 33.2 532 37.8

Taxes 715 47.8 556 39.5

Property 13 0.9 411 29.2

Sales 345 23.1 89 6.3

Individual income 246 16.4 25 1.8

Corporate income 39 2.6 7 0.5

Other revenue

Education 90 6.0 26 1.8

Hospitals 39 2.6 65 4.6

Utility 17 1.1 127 9.0 Source: Census Bureau (2011), p. 6.

Table 8

State and local expenditures

State Local

$b % $b %

Total 1827 1641 Intergovernmental 491 26.9 15 0.9

Education 243 13.3 608 37.1

Higher education 196 10.7 39 2.4

K-12 education 8 0.4 569 34.7

Public welfare 379 20.7 52 3.2

Hospitals/health 97 5.3 121 7.4

Highways 91 5.0 61 3.7

Airports 2 0.2 21 1.3

Police/fire 12 0.7 121 7.4

Corrections 48 2.6 27 1.6

Government admin. 31 1.7 52 3.2

Judicial and legal 21 1.1 22 1.3

Parks and recreation 5 0.3 35 2.1

Housing and devt. 8 0.4 39 2.4

Sewerage/ solid waste 4 0.2 68 4.1 Source: Census Bureau (2011), pp. 7-8.

PAD 4003 lecture 9

Page 12 of 13

Approaches to budgeting. Henry's chapter on budgets includes a long discussion of historical

phases in budgetary theory.

Line item -- "simply the allocation of resources according to the cost of each object of

expenditure" (Henry, p. 204-7). Line item budgeting is what you do if you keep a personal

budget: count money coming in, county money going out

Performance budgeting -- "attuned to identifying broader programs and government

performance as well as objects of expenditure" (p. 207-9).

Planning-programming-budgeting -- "a system or resource allocation designed to improve

government efficiency and effectiveness by establishing long-range planning goals,

analyzing the costs and benefits of alternative programs that would meet these goals, and

articulating programs as budgetary and legislative proposals and long-term projections" (p.

209-11).

Management by objectives -- quoting Jun "'a process whereby organizational goals and

objectives are set through the participation of organizational members in terms of results

expected,' and resources are allocated according to the degree to which organizational goals

and objectives are met" (p. 211-2).

Zero-base budgeting -- "the allocation of resources to agencies on the basis of those agencies

periodically reevaluating the need for all of the programs for which the agency is responsible,

and justifying the continuance of termination of each program in the agency budget proposal"

(p. 212-3). In other words, this is a sort of 'anti-incremental' budget, where one doesn't start

assessing one's budget for t2 by starting from the budget in t1.

Target-based budgeting -- "allocating resources to agencies in which agency spending limits

(and often agency goals, too), or targets, are set by the chief executive officer of the

government; agency heads are permitted to attain their goals in the manner that they deem to

be most effective within these centrally set spending limits, and are expected to demonstrate

progress in the achievement of agency goals in next year's budget request" (p. 213-5).

Cutback mgmt -- "a pastiche of methods used to reduce government spending" (p. 215).

o Short term:

Hiring freezes.

'Across-the-board' funding cuts.

Reducing temporary employees,

deferring maintenance,

postponing equipment purchase

o Long term

Reorganizing (streamlining)

New technology -- clerks out,

computers in.

Productivity improvement

Alternative delivery systems

Prioritizing

Rearranging government relations -- "intergovernmental service agreements;

annexation of adjacent territory by municipalities; consolidation, or the merging of

two or more local governments; and regional approaches to governing" (p. 216).

Budgeting for results -- "a system of resource allocation that links the disbursement of

funds to performance measures. Results budgeting is, most definitely, a return to the

traditions of Program/Performance Budgeting of the 1950s" (p. 217-8).

Budgeting strategy and tactics. Finally: theory aside, politics rules. 'Success' is measured by

bringing more resources into your department. Is this consistent with good government

ethics? Who, after all, does the manager serve: her department, or the citizens? Strategies and

tactics:

PAD 4003 lecture 9

Page 13 of 13

Find, serve and use a clientele for the services you perform, and mobilize these

stakeholders in the event of cuts.

Knowledge rules: convince legislators that you know better than them, they need to trust

you. Henry offers the National Science Foundation as exemplar, think, also, about

NASA in this role.

Capitalize on the fragmented nature of the process: make down-payments that then have

to be honoured.

Various other 'contingent' shell games.

Public finance. Nicholas Henry doesn't spend much time on public finance, so I'll add a few

comments from Denhardt and Grubbs, which I've used in the past. Public finance includes

"the long-term financing of buildings, roads and highways, and equipment;

they must carefully plan and manage borrowing;

they must ensure against future losses; and,

in all cases, they must try to get the most for the money they spend" (p. 185).

Capital budgeting -- Capital expenditures are often treated separately, in a capital budget which

often is financed by a large share of debt. Given that "the benefits of these items are spread over

future generations... it is therefore not unreasonable to share the burden of repaying the money

borrowed" (Denhardt & Denhardt, p. 186). If one applies this logic to the current policies of

cutting taxes in times of deficit spending, the logic would be that the benefits of Paris Hilton's

tax-cut driven spending are spread over future generations, so it is reasonable to share the burden

of repaying the money borrowed to fund her tax cuts. Hey: don't blame public administration,

this is a political problem.

Capital stocks. Capital budgeting (if not deficit spending) looks long term. It is also worth

thinking in terms of capital stocks. The community that saves money from its current budget by

cutting back on maintaining its infrastructure, may in reality be losing money. Though the

current budget remains in balance, the stock of useful infrastructure in the community has

depreciated, much like the loss in value of a house.

Risk Management -- legal liability: if you provide coffee at a public function, be careful! The

first step (reassuringly) in risk management is to identify potential risks, and reduce them (p.

189). Insurance is a solution for local governments that don't decide to insure themselves

(through paying these costs through operating expenditures).

* Summary: Budgeting: it's not all about the money!

References

Daniels, Mitch (2001). Press briefing, 22 August.

Denhardt, Robert and Joseph Grubbs (2003). Public Administration: an action

orientation. Thomson.

Keynes, John Maynard (1936). The General Theory of Employment, Interest and

Money. Cambridge: Cambridge University Press.

Kunin, Madeleine (1994). Living a Political Life. New York: Vintage.