Ch4. Public Financial Administration — Budget Types and the Budget Cycle

The Meaning and Principles of a Budget

Budget:
A government's plan for revenues and expenditures over a defined period
Enacted into law by Congress (appropriations acts)

Traditional Budget Principles:
Publicity: open to the public
Clarity: content presented in understandable terms
Prior Authorization: spending requires advance legislative approval
Limitation: restricted by purpose, amount, and time period
Comprehensiveness: all revenues and expenditures included
Unity: one unified budget
Accuracy: realistic estimates

Flexibility Mechanisms:
Continuing Resolution (CR): temporary spending authority when regular appropriations lapse
Supplemental Appropriations: additional funding enacted mid-year for unforeseen needs
Rescissions / Impoundments: executive cancellation of previously enacted spending

Evolution of Budget Systems

Line-Item Budget (Traditional / Object-of-Expenditure):
Classifies spending by object (salaries, supplies, travel, contracts)
Emphasizes expenditure control
Weakness: difficult to assess program effectiveness

Performance Budget:
Organizes spending around program goals and measurable outputs
Emphasizes management efficiency
Used in GPRA (Government Performance and Results Act, 1993)

Planning-Programming-Budgeting System (PPBS):
Integrates long-range planning + program analysis + budget allocation
Uses systems analysis and cost-benefit analysis
Introduced by McNamara in DoD (1961), extended government-wide (1965)

Zero-Based Budgeting (ZBB):
Each budget cycle starts from zero — every program must be justified anew
No automatic baseline from the prior year
Pros: eliminates waste and unnecessary programs
Cons: extremely time-consuming and resource-intensive

Management by Objectives (MBO):
Department sets goals; budget tied to achieving those goals
Widely used in conjunction with performance appraisal systems

The U.S. Federal Budget Cycle

① Budget Formulation (Executive Branch):
Agencies submit budget requests to OMB (Office of Management and Budget)
OMB reviews, negotiates, and compiles the President's Budget
President's Budget submitted to Congress (first Monday in February)

② Congressional Action (Legislative Branch):
Budget Committees set overall spending targets (Budget Resolution)
Appropriations Committees draft and enact 12 annual appropriations bills
Congress must act by October 1 (start of federal fiscal year)

③ Budget Execution:
Agencies execute appropriated funds through apportionment (OMB) and allotment
Transfers, reprogramming, and carryover subject to OMB and statutory rules

④ Audit and Accountability:
Agency Inspectors General conduct internal audits
GAO (Government Accountability Office) conducts independent audits for Congress
Financial statements audited annually; results reported to Congress

Federal Fiscal Year: October 1 – September 30
President's Budget submission: first Monday in February
Congressional deadline: October 1 (new fiscal year)

Types of Federal Funds

General Fund:
Largest fund; finances core government operations
Funded primarily by individual and corporate income taxes

Special Funds:
Dedicated to specific purposes mandated by law
Example: Social Security Trust Funds (payroll taxes → Social Security benefits)

Revolving Funds:
Self-financing; receipts replenish the fund
Example: Postal Service, Federal Prison Industries

Trust Funds:
Held in trust for a specific purpose
Example: Highway Trust Fund (gas tax → transportation spending)

Unified Budget:
Combines all fund types for a comprehensive picture of federal finances
Used to calculate the federal deficit or surplus

Key Concept Cards

Budget Cycle Sequence ★★★★★ : Formulation (OMB/President) → Congressional Action → Execution → Audit (GAO/IGs). Memory tip: OMB builds it, Congress enacts it, agencies spend it, GAO checks it

ZBB Characteristics ★★★★★ : Starts from zero; every program must be re-justified each cycle. Eliminates waste but is highly labor-intensive. Memory tip: ZBB = zero baseline, justify everything

General Fund vs. Trust Funds ★★★★☆ : General = broad government operations. Trust = dedicated purpose tied to specific revenue streams. Memory tip: trust funds are earmarked, general fund is discretionary

Practice Questions

Q. Why does Congress sometimes enact Continuing Resolutions instead of regular appropriations?

When Congress and the President cannot agree on appropriations bills before the fiscal year begins (October 1), a CR provides temporary funding authority — usually at the prior year’s rate — to prevent a government shutdown. CRs can last days or months; prolonged CRs create planning uncertainty for agencies.

Q. What is the core difference between a performance budget and a line-item budget?

Line-item budgeting focuses on controlling inputs (what is purchased: salaries, supplies, travel). Performance budgeting focuses on outputs and outcomes (what is achieved: number of citizens served, miles of highway maintained). Performance budgeting, reinforced by GPRA, uses strategic goals and performance metrics as the basis for budget decisions.