The Policy Process and Budgeting
Setting Priorities,
Funding Programs
Overview
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

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
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
The decisions, rules, and actions of the
government that are designed to achieve
certain goals
Policy constrained by
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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
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
Policy process constrained by budget
Budget constrained by economic policy
Setting the Budget

Revenue
Revenue Sources (FY2004)
Setting the Budget
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Revenue
Expenditures
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Direct spending
Discretionary spending
Government Expenditures (FY2004)
Setting the Budget
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
Revenue
Expenditures
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Direct spending
Discretionary spending
Revenue – Expenditures
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Surplus
Deficit
Budget Surplus/Deficit
National Debt
The Federal Budget Process
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
President’s Budget Request
Congressional Budget Resolution
President’s Budget Request
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Federal agencies submit requests to Office of
Management and Budget (OMB)
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18 month lead time
Summer of 2005, agencies submitting requests for
budget that will go into effect October 1, 2006
OMB
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Proposed budget to Congress
Due by first Monday in February
Congress’s Job
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Congressional Budget Office report
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CBO makes economic forecast to predict revenues
February 15
Individual committees make requests to
Budget Committees
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Mid- to late March
Congress’s Job
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House and Senate Budget Committees draft
“Budget Resolution”
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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
Appropriations
Committee
President’s
Budget
CBO
Projections
Committee
Requests
Budget Committees’
Budget Resolution
Appropriations
Committee
Appropriations
Committee
Congress’s Job

Appropriations Committees
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House and Senate
Dollars for programs
Constrained by Budget Resolution
President’s signature required on appropriations
Budget Deadline: September 30

Miss the deadline?
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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?
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Process is very long
But, there is a deadline – decisions under
pressure
Many, many people involved – too many
cooks?
Constraints on Budget Process
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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
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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
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–
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Define and protect property rights
Maintain the peace
Public expectations (post-Great Depression)
Market failures
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Monopolies
Public goods
Should the Government Be
Involved And, If So, How Much?
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Beliefs about the proper level of government
involvement depend on beliefs about how the
economy works
Three key theories
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Laissez-faire capitalism
Keynesianism
Monetarism
Laissez-faire Capitalism
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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
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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
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–
Cut income taxes on this broad segment of society
Create jobs through public employment
Monetarism
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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
Economic
Growth
Economic
Equality
Economic
Stability
Govt. Role Minimal
Major
Moderate
Govt.
“Tools”
Tax rates,
government
spending
Control money
and interest
rates
Primary
Concern
None
What Policies Can Govt. Use to
Control Economy?
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Monetary policies
Fiscal policies
Regulation
Subsidies and Contracting
Monetary Policies
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Set interest rates
Control banking regulations (affects how much
money banks have to “play with” and lend to
consumers)
Fiscal Policies

Tax
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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
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Can create jobs
Affect overall health of economy
Regulation
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Break up monopolies (antitrust policy)
Set minimum wages and work hour limits
Child labor laws
Safety and health requirements
Subsidies and Contracting
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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)
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Examples: NSF grants, crop subsidies, land grants to
“settlers” in 1800s
Contracts (opportunities for firms to do business with
the government – can impose conditions!)
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Examples: providing contracts to new industries to help them
develop, requiring firms who contract w/ govt. to engage in fair
employment practices