CHAP04-Gruber2e

Preparedby:FERNANDOQUIJANO,YVONNQUIJANO,KYLETHIEL&APARNASUBRAMANIAN4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruberPublicFinanceandPublicPolicy,2/eJonathanGruberChapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber2of36ToolsofBudgetAnalysis4.4WhyDoWeCareAbouttheGovernment’sFiscalPosition?4.3DoCurrentDebtsandDeficitsMeanAnything?ALong-runPerspective4.2MeasuringtheBudgetaryPositionoftheGovernment:AlternativeApproaches4.1GovernmentBudgetingChapter44.5ConclusionChapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber3of36GovernmentBudgeting4.1debtTheamountagovernmentowestothosewhohaveloaneditmoney.deficitTheamountbywhichagovernment’sspendingexceedsitsrevenuesinagivenyear.Chapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber4of36GovernmentBudgeting4.1TheBudgetDeficitinRecentYearsChapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber5of36GovernmentBudgeting4.1TheBudgetProcessThebudgetprocessdistinguishesbetweentwotypesoffederalspending.entitlementspendingMandatoryfundsforprogramsforwhichfundinglevelsareautomaticallysetbythenumberofeligiblerecipients,notthediscretionofCongress.discretionaryspendingOptionalspendingsetbyappropriationlevelseachyear,atCongress’sdiscretion.Chapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber6of36EffortstoControltheDeficitAPPLICATIONTheBalancedBudgetandEmergencyControlAct(alsoknownastheGramm-Rudman-HollingsDeficitReductionAct,orGRH)waspushedthroughCongressandontoPresidentReagan’sdesk,wherehesignedthebillonDecember12.Atriggerprovisionwasincludedthatinitiatedautomaticspendingcutsoncethebudgetdeficitstartedmissingthespecifiedtargets.Thetriggerwasavoidedbygimmicks,forwhichnopenaltieswereincurredbylawmakers.FailuretomeetGRHdeficittargetsledtothe1990adoptionoftheBudgetEnforcementAct(BEA):ratherthantryingtotargetadeficitlevel,theBEAsimplyaimedtorestraingovernmentgrowth.Itcreatedthepay-as-you-goprocess(PAYGO)forrevenuesandentitlements,whichprohibitedanypolicychangesfromincreasingtheestimateddeficitinanyyearinthenextsix-yearperiod.Ifdeficitsincrease,thePresidentmustissueasequestrationrequirement,whichreducesdirectspendingbyafixedpercentage.PAYGOexpiredonSeptember30,2002.PresidentBushproposeditsrenewalonlyaftertheadoptionofa2004budgetresolutioncontainingproposedtaxcutsandspendingincreases,butitremainsunrenewed.MuchasGRHbeforeit,theBEAappearstohavelostmostofitsbitesincethelate1990s.Chapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber7of36GovernmentBudgeting4.1BudgetPoliciesandDeficitsattheStateLevelbalancedbudgetrequirement(BBR)Alawforcingagivengovernmenttobalanceitsbudgeteachyear(spending=revenue).expostBBRAlawforcingagivengovernmenttobalanceitsbudgetbytheendofeachfiscalyear.exanteBBRAlawforcingeitherthegovernortosubmitabalancedbudgetorthelegislaturetopassabalancedbudgetatthestartofeachfiscalyear,orboth.Chapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber8of36MeasuringtheBudgetaryPositionoftheGovernment:AlternativeApproaches4.2Realvs.NominalrealpricesPricesstatedinsomeconstantyear’sdollars.ConsumerPriceIndex(CPI)Anindexthatcapturesthechangeovertimeinthecostofpurchasinga“typical”bundleofgoods.nominalpricesPricesstatedintoday’sdollars.Chapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber9of36MeasuringtheBudgetaryPositionoftheGovernment:AlternativeApproaches4.2TheStandardizedDeficitstandardized(structural)budgetdeficitAlong-termmeasureofthegovernment’sfiscalposition,withshort-termfactorsremoved.cyclicallyadjustedbudgetdeficitAmeasureofthegovernment’sfiscalpositioniftheeconomywereoperatingatfullpotentialGDP.Chapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber10of36MeasuringtheBudgetaryPositionoftheGovernment:AlternativeApproaches4.2TheStandardizedDeficitChapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber11of36MeasuringtheBudgetaryPositionoftheGovernment:AlternativeApproaches4.2Cashvs.CapitalAccountingcashaccountingAmethodofmeasuringthegovernment’sfiscalpositionasthedifferencebetweencurrentspendingandcurrentrevenues.capitalaccountingAmethodofmeasuringthegovernment’sfiscalpositionthataccountsforchangesinthevalueofthegovernment’snetassetholdings.Chapter4ToolsofBudgetAnalysis©2007WorthPublishersPublicFinanceandPublicPolicy,2/e,JonathanGruber12of36MeasuringtheBudgetaryPositionoftheGovernment:AlternativeApproaches4.2Cashvs.CapitalAccountingProblemswithCapitalBudgetingThereareenormouspracticaldifficultieswithimplementingacapitalbudgetbecauseitisveryhardtodistinguishgovernmentconsumptionfrominvestmentspending.Thedifficultiesmightmakeiteasierforpoliticianstomisstatethegovernment’sbudgetarypositionwithacapitalbudgetthanwithoutone.Whilesomest