Government Budget

A government budget (sometimes called public budget) is a document that specifies the origin and volume of both income (“receipts”) and intended spending over a certain time horizon (usually a year).

Receipts consist of income from direct and indirect taxation, social insurance contributions, revenues from public assets, sale of public services, and, possibly, the disposal of public assets.

Spending is made on core sovereign activities (such as police, justice, foreign policy, and defense), the provision of public services (infrastructure, research), social transfers, and interest on public debt.

Budgets are established autonomously by different public entities such as the central government, public agencies, and state and local governments.

Budgeting practices are generally broadly similar across subcomponents of government. For international comparison and overall monitoring purposes, statisticians aggregate their account into that of the general government.

The US Federal Budget Process

The US federal budget process begins each year with the submission of the president’s budget proposal to Congress Opens in new window on the first Monday of February.

By early April, the House and Senate budget committees (which may or may not draw on the President’s proposal) submit their draft resolutions to the floor for adoption. Differences between the two chambers are resolved by a conference committee.

For the next phase, a distinction is made between mandatory and discretionary spending.

  • The first refers to spending that is not subject to current congressional approval (for example, it may result from entitlements and other effects from laws enacted in the past—services votes to use the telling French expression).
  • Discretionary spending, however, requires an appropriation bill  Opens in new window.
  • Both chambers work in parallel on 12 categories of spending, each of which is assigned to a different subcommittee.
  • Bills are then passed in each chamber and differences are ironed out in a conference.
  • The appropriation bills are expected to be signed into law by the President, at the latest on October 1. If not, Congress passes a continuing resolution to finance the government on a short-term basis and avoid a shutdown (as happened for example in 2013).

Meanwhile, mandatory spending is reviewed by authorizing committees that are also in charge of determining whether additional revenues are needed to finance it.

The budget committee Opens in new window consolidates the authorizing plans into an omnibus package that is sent to the floor for vote and then to the President for signature.

The parliamentary process therefore takes eight months and often more if it is not concluded by October 1.

Familiar budget categories include capital expenditures (investment on infrastructure and, since recent revisions of national account systems, also spending on research and development) and current expenditures (all other items).

Interest charges on the public debt Opens in new window depend on the debt level and on long-term interest rates, two variables that, in the short run at least, are beyond the control of the government.

Therefore, a useful concept to assess the evolution of spending is that of primary expenditures (all spending except interest on public debt). Conditional financial assistance programs negotiated by the International Monetary Fund (IMF) Opens in new window generally specify targets for primary expenditures.

Government accounting rules differ across countries, but the European Union Opens in new window has put in place a harmonized system of public accounts.

All accounts are now recorded on an accrual basis rather than on a cash basis (meaning that transactions are recorded when economic values is created or when claims arise rather than when payments are made). European procedures also distinguish exceptional, or one-off expenditures, from recurring expenditures.

The preparation of the draft budget, its discussion, and its adoption by parliament are important stages of economic policy decision-making. Organization, procedures, and the time frame vary substantially from country to country.

A typical sequence includes the preparation of economic and government receipts forecasts; the setting of expenditure ceilings by sectors; the preparation, by the government departments, of their own draft budgets; cabinet discussions and the consolidation of the whole budget; and discussions and final vote in parliament. The overall process requires at least six months.