government budget
government budget, 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.
This related to taxes only, not expenditures. For centuries Parliament seemed content to restrict the amounts that the sovereign levied while letting him spend the money as he pleased. Only after the controversies of the 17th century culminated in the Glorious Revolution (1688–89) and the Bill of Rights did Parliament extend its concern from taxation to the question of expenditure control.
The histories of many countries have turned on financial crises. In France, for instance, the struggle between the monarchy and the 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 fluctuations. This stabilization function has been used by many countries, with varying degrees of success, to expand the economy out of recession and to control inflationary pressures. In the United Kingdom, for example, postwar policy involved a sequence of “stop-go” moves by government for stabilization; unfortunately these often occurred too late and had unintended destabilizing effects.
As well as affecting the overall economy, the budget may have significant (intended and unintended) effects in specific areas. Taxes affect incentives to work or to consume, while taxes, benefits, and expenditures all affect the distribution of income. In this manner, budgets, particularly those that cause major changes, have considerable political as well as economic impact.
The accounting functions of the budget
Traditionally the budget is presented to allow scrutiny (by taxpayers, voters, and the legislature) of the resources raised by government and the uses to which these will be put. The publication of a budget thus performs the role of generating accountability for the actions of government at various levels. Historically, the focus of budgets has been to ensure that expenditures and revenues are properly authorized; more recently, the budget has been developed as a framework within which complex decisions on the allocation of resources can be made more effectively.