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government budget
Encyclopdia Britannica Article
Introduction
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.
General considerations
Role of the budget
Traditional functions
Government budgetary institutions in the West grew up largely as a
result of the struggle for power between the legislative and executive
branches of government. With the decline of the feudal system, it
became necessary for kings and princes to obtain resources for their
ventures from taxation rather than dues. With the disappearance of
the old feudal bonds, taxpayers demanded to be consulted before they
were taxed. In England this was written into Magna Carta (1215),
which stated:
No scutage or aid shall be imposed in our kingdom unless by
common counsel of our kingdom, except for ransoming our
person, for making our eldest son a knight, and for once
marrying our eldest daughter, and for these only a
reasonable aid shall be levied.
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nobility over control of tax revenues was one of the causes of the
Revolution of 1789 that led to the overthrow of both the monarchy and
the nobility.
The U.S. budget system also evolved out of controversy. In the early
days of the republic there was a dispute between Alexander Hamilton
and Thomas Jefferson as to the amount of discretion that the
executive branch should exercise in the spending of public funds.
Jefferson's victory enabled Congress to assert its authority by making
appropriations so highly specific as to hinder executive action. Had
Hamilton won, the treasury would have attained extraordinary power
in relation both to Congress and to the president.
Modern functions
In the 20th century a high proportion of economic activity is
controlled, directly or indirectly, by various levels of government
(federal, or central, state, local, etc.). Thus the budget has taken on a
number of other functions as well as the simple monitoring of the
overall revenue and expenditure of government. Expenditure programs
are now planned in considerable detail, but the sheer scale of public
spending raises major control problems, and varying systems of control
have been tried in different countries. Taxation is used not only to
raise revenue but also to redistribute income and to encourage or
discourage certain activities. Government borrowing, in order to
finance recurring deficits or wars, is so substantial that budgetary
policy has important effects on capital markets and on interest and
credit generally. Because the budget is now so important to national
economies, a number of different procedures for deciding on the
structure of the budget have been developed, and these vary
considerably between countries. In some, the United Kingdom, for
example, most planning is carried out in secret by ministers and civil
servants, and public and parliamentary debate is minimal; while in
others, the United States, for example, there is lengthy debate during
which the budget can be changed significantly. The different levels of
government complicate the budgetary process with differing spheres
of influence and control over particular items of expenditure.
The budget has also come to be used to achieve specific goals of
economic policy. It was long recognized that government borrowing
could have important effects on the rest of the economy. As the scale
of government activity increased, the levels of expenditure and
taxation were seen to have substantial direct effects on the total
demand for goods and services in the economy. This raised the
possibility that by changing these levels the government could use its
fiscal policy to achieve full employment and reduce economic
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Administrative budget
The traditional administrative budget contains the executive's
recommendations concerning the raising of what Magna Carta referred
to as scutage or aid and the disposal of it for purposes of
government. This kind of budget is designed to control expenditure;
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or are loans to other public bodies. Such items are then included
below the line, and the traditional concept of budget balance is not
applied to them; instead, it is regarded as permissible to finance them
by borrowing.
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The cash budget suffers from the defect that it is not directly tied to
government decision making. Liabilities incurred do not synchronize
completely with payments. This is because government expenditures
result from appropriations and other forms of commitments; cash
expenditures may follow appropriations and other commitments of
money only after a considerable lag, notably in the case of
construction and procurement. Appropriations relate to actions in the
future. Expenditures result from past decisions. Both kinds of
information are needed for a complete appraisal.
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In the late 1970s many countries recognized that the steady growth in
public expenditure was putting a strain on their economies, and they
attempted to curtail the growth. The Jimmy Carter administration in
the United States, although planning for a steep rise in expenditure as
a proportion of gross domestic product (GDP), also attempted to
introduce the concept of zero-base budgeting, whereby the entire
government program, not just its incremental parts, was to be
evaluated each year. This idea, which involved considerable changes
to existing procedures, was applied to some programs on a selective
basis but never had the impact its designers envisaged. A similar
attempt was made in the United Kingdom in the introduction of
program analysis reviews (PAR), but again attempts to evaluate
systematically the whole of government expenditure were
unsuccessful. The degree of inertia in the system and the vested
interests of existing institutions have proved too entrenched to be
overcome by administrative procedure.
Full-employment budget
Although the idea of budget balance in the administrative budget has
been the dominant consideration in the budgetary policy of most
countries, it has gradually been realized that such a concept may be
inappropriate when external shocks such as exchange rate movements
or a world recession occur. Because varying levels of unemployment
are a major reason why expenditures may change without comparable
change in the public sector output, the concept of a full-employment
budget has emerged. This type of budgeting is based on receipts and
expenditures that would prevail under conditions of full employment.
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The approach views the actual expenditures and receipts for the
coming year as of secondary importance; it assigns primary importance
to the influence of the budget on the national economy. In time of
recession a budget deficit may thus be presented as a necessary step
toward achieving a balanced budget at full employment. Ideally, the
budget should include estimates of expenditures and revenues at full
employment, and also estimates of the same items at the anticipated
level of employment. These ideas have been extensively used in the
United States.
An analogous procedure could be used with respect to inflation, but
this idea is still far from acceptance, because governments are no less
reluctant to anticipate inflation than they are to budget for
unemployment.
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service, and the services that are provided rarely have well-developed
private sector counterparts to act as a basis for comparison.
In some programs, governments have developed efficiency measures
that relate observable facts, such as the quality of national health or
the number of operations performed, to the cost of providing the
service. The use of such measures is by no means widespread,
however, and their basis is often open to question. The principal
difficulty is that there is either no meaningful measure of the output
of a public servicedefense, for exampleor output is complicated
and multidimensionalas with education or health. The result is that
any method used to measure efficiency is open to debate and
challenge.
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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 withholding 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.
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
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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.
John Anderson Kay
Ed.
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Public expenditure also depends on the price of the goods and services
that the public sector buys and on the efficiency with which they are
used. Public sector workers are often highly organized and may be well
placed to demand pay increases from an employer who is able to
recoup the costs from taxation. Public sector purchasing may be
inefficientcivil servants may find it easier to enjoy a comfortable
relationship with their suppliers, and, in fields such as health and
military expenditures, administrators may demand the latest
technologies with little regard for their cost-effectiveness.
At the same time, much of the public sector lacks the incentives to
increase efficiency that apply to private firms in competitive markets.
It is easier to resist innovation, and bureaucracies often have a
conservative culture in which it is more important to avoid mistakes
than to experiment with new techniques and procedures. With few
external indicators of performance, managers in the public sector may
feel inclined simply to promote the growth of their organization and
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Revenue
Governments acquire the resources to finance their expenditures through
a number of different methods. In many cases, the most important of
these by far is taxation. Governments, however, also have recourse to
raising funds through the sale of their goods and services, and, because
government budgets seldom balance, through borrowing. The subject of
borrowing, because of the intricacies of deficit spending, is covered in a
separate section of this article.
Taxation
Most countries raise resources through a variety of taxes, including
direct taxes on wage and property income, contributions to trust
funds, and a variety of indirect taxes on goods, either at the final
point of sale or on the inputs used to make them. A smaller amount of
revenue is raised from taxes on property, on capital gains, and on
capital transfers, particularly at death. Most countries have a separate
corporate income tax.
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Sales taxes are less obvious, as they change the price of goods a
consumer buys rather than his income. At times of high inflation, it
is often hard for taxpayers to identify what proportion of the price
rise is actually caused by increased taxation, which has led to
increasing reliance on this kind of tax. But sales taxes too have their
limits; when the proportion of tax on a good is sufficiently high,
consumption declines, and there is political pressure from
consumers and industry to reduce the tax increases. Governments
have been reluctant to increase indirect taxes significantly as the
control of inflation has become a major policy goal.
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Government borrowing
Although most of the resources required for public spending are raised
each year through taxation, it is rare for any modern budget to balance
in any one year. For a variety of reasons, ranging from a desire to
accelerate capital spending to a policy of economic stabilization,
governments may choose to raise some of their resources by borrowing
rather than taxation. Most countries today run an annual budget deficit,
and the deficits have tended to increase in size. For some countriessuch
as the United States and many developing countriesthis means that the
burden of the debt has been steadily increasing. Although many European
countries also run a current deficit and their total debt may be increasing
in size, the rate of increase is often much smaller than that of the United
States and often below the rate of growth of national income. Thus, the
burden of the debt is increasing less rapidly and, in some countries, may
even fall. In times of inflation it may be possible for a government to run
a deficit without actually increasing the real burden of debt, as inflation
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Although most countries ran a deficit budget in the late 20th century in
response to a world recession and high rates of inflation, only a minority
did so in the 1960s. In the European Economic Community (later
succeeded by the European Union), on average over the period 196073,
only Belgium, Ireland, Italy, the Netherlands, and the United Kingdom ran
a deficit.
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Other bonds bought by the public are not marketable but can be
redeemed, at least after a specified period, for their principle plus
accrued interest. Various savings bonds, including those of the
United States, are of this kind.
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Other characteristics
Bondholders may receive current interest either by redemption of
coupons attached to the bonds or by check from the government.
Alternatively, interest may be receivable only upon maturity or
redemption of the bond, as in the case of savings bonds. Interest
and principal are usually payable in fixed monetary units, but they
may be payable in amounts with fixed purchasing power based on
changes in price levels.
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Wartime finance
The use of borrowing is regarded as inevitable in periods of major war.
If taxes were increased sufficiently to finance all war costs, they could
seriously impede the war effort by impairing incentives to work and by
reducing the overall morale of the people. The limits of economically
and politically tolerable taxation may well be below the maximum
feasible allocation of resources to the war effort. Adequate tax
increases would also aggravate the inequities of the tax structure; an
overall level that would reduce total consumer spending to a level
equal to the rate of output of consumer goods might well push some
persons below subsistence levels and make it impossible for others to
meet fixed commitments. While the use of borrowing as a method of
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The states incurred substantial debts in the early part of the 19th
century, largely for public improvements, and some found
themselves in financial difficulties. As a result, borrowing came
nearly to an end until after 1900; after that date there was further
borrowing, particularly for highways. After 1945 the state debt
increased sharply and had passed $167,000,000,000 by the
mid-1980s. Much of this additional borrowing was for highway
purposes. The local governments have traditionally borrowed more
than the states, largely because of the nature of their functions.
Local debt in the 20th century increased steadily and had passed
$287,000,000,000 by the mid-1980s.
Canada
Canada's debt began with $75,000,000 (Canadian) at the time of
confederation in 1867, when certain obligations were taken over
from the provinces. The figure grew slowly until 1915, largely
because of government railroad financing. World War I pushed the
figure to $3,042,000,000 by 1920; the total rose as the Canadian
National Railway was developed, fell slightly in the late 1920s, rose
to $5,000,000,000 with Depression borrowing, and reached
$15,713,000,000 at the end of World War II. Some debt fluctuation
then took place and the figure reached about $17,000,000,000 by
1950. By April 1969 it had risen to $35,800,000,000 as a result of
deficits. Canadian debt continued to rise until 1976, when it briefly
decreased by about 5 percent from the previous year. By the
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Sovereign debt
The oil crisis of 197374 and its aftermath created a new instability in
world capital markets. Some countries, particularly Middle East
producers with few economic activities not based on oil, gained
revenues much in excess of their capacity to spend. Others,
particularly in the less developed world, faced balance-of-payments
problems that they found difficult to cover. Some other oil producers,
such as Mexico, borrowed heavily in anticipation of rapidly increasing
revenues. Those countries with surpluses of revenues over
expenditures wanted to retain the liquidity of the financial assets that
they acquired, and Western banks increasingly took on the role of
intermediaries between the surplus and deficit countries. This led to
the growth of sovereign lendingbank lending either to governments
or to agencies of governments with government guarantees. While a
bank lending to a private individual or company normally requires
examination of the relationship of the loan to the borrower's assets,
and of the interest to income or cash flow, banks felt able to apply
more relaxed criteria to sovereign loans.
By the early 1980s, however, it was apparent that for many countries
sovereign debt had grown to levels at which even the interest on these
loans would be met only by further borrowings. Moreover, these
countries' limited capacity to repay might be undermined by political
or economic instability. The problem was particularly acute in Latin
America, where U.S. banks had lent aggressively. Argentina, Brazil,
and Mexico had very large external debts; smaller countries such as
Bolivia, Ecuador, and Peru had debt burdens that were even larger in
relation to their capacity to service them. Similar difficulties were
encountered in Africa and in parts of eastern Europe, particularly
Poland.
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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.
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Germany
Germany differs somewhat from other countries in that there are
unusual constraints on government borrowing and unusual reliance on
countercyclical taxes and reserves. This is a direct result of Germany's
history of extreme inflations. Detailed rules of budgetary behaviour
apply to particular circumstances to determine whether deficits of
borrowing are permitted.
Japan
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Communist countries
In countries having Communist governments, economic activity either
is carried on by state enterprises or is subject to central control. The
national budgets therefore have a much broader scope than in
countries where most economic activity is in the private sphere. For
example, in the now-defunct Soviet Union more than 90 percent of
capital investment was financed by the government; in the United
States the corresponding figure was less than 25 percent, and in the
United Kingdom it was less than 50 percent.
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for local services, the only source of local revenue was a property tax
called rates.
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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.
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