National budget is prepared by the government and approved by the legislature, reflecting the income and outlay plan of a country’s each fiscal year. The government uses the budget system to affect the allocation of financial resources. It is the main carrier and the core content in a country’s fiscal system, and relates the most extensive public interests. ( Wilson, 2010) The United States is the largest economic country in the world, and is also one of the mature market economy nations. U.S. has evolved an excellent budget system. This essay will attempt to explain the characteristics of the line item budget and program budget of U.S. and compare them under the NPM. The essay will firstly look at budget system background of the United States and the relationship between executive and legislature in separation of powers of the U.S. Following this, it will demonstrates the fiscal constraints and issues in the United States in recent years. Finally, explain the strengths and drawbacks of PPBS and line item budgeting approaches in U.S.
The first part of the essay is focus on the budget system background of the United States and the relationship between executive and legislature in separation of powers of the U.S.
The United States is a constitutional democracy of the republic, the Constitution as the supreme criterion and it implement the separation of powers. The federal government of the United States has three branches, the executive branch, judicial branch and legislative branch respectively. The administrative organizations are responsible for the implementation of the state law. ( Wilson, 2011) According to the provisions of the U.S. Constitution, the Congress is the legislative branch or the law making legislature authority. The powers of the legislative, executive and judicial of the United States are exercised by the three independent branches, and combine the system of mutual check and balance. The separation of powers has provide a framework for the process of the U.S. federal budget. ( Sobel and Tanzey, 1999) In budget process, the executive branch and the legislative branch have a clear boundary. Through the legal management of the budget make the fiscal behaviour of the government under the supervision of the people. (Maltese, 1995)
As a country with excellent budget system, the U.S. the National Congress and the President use the federal government budget to decide the scale of the fiscal expenditures, all kinds of expenditure items and revenue plan. The U.S. fiscal year is from the October 1st in this year to the following year September 30th. A complete budget cycle of U.S federal government can separate into four stages: the preparation of the budget draft; the Congress consideration; budget execution; audit and evaluation on the execution of the budget. Besides, the 50 states and larger local government of the United states usually use the similar four stages of budget cycle with the federal government. (Heniff, 2009)
In recent years, the development of U.S. economy is not smooth. The second part of the essay will focus on the fiscal constraints and issues in the United States in recent years.
Deficit is an important indicator to measure the financial risks. The emergence of the budget deficit is the government budget revenue less than the budget expenditure. (Santow, 1988) After the end of the 2011 fiscal year, the government budget deficit of the U.S. was the second-highest level $1.3 trillion, occupied 8.6% in GDP and inferior to the 2009 fiscal year highest-level $1.41 trillion. This is the third consecutive year of the U.S. government budget deficit exceeds $1 trillion and shows the U.S. debt risk is still expanding. According to the data revealed that, the percentage of the 2011 fiscal year’s budget deficit occupied the GDP is 8.7%, slightly lower than last year. The annual revenue is $2.3 trillion, an increase of 6.5%; the outlays are $3.6 trillion, an increase of 4.2%. The rising fiscal deficit has become a major economic challenged for the U.S. ( Congressional budget office, 2011)
In 2011, although the U.S economy has been out of the crisis, but the high unemployment and the weak real estate market are the most two critical factors drag the growth of the U.S. economy. The unemployment rate was still hovering around the level over 9%. At the same time, the high budget deficit of the U.S government and the low growth in consumption, etc. continue to plague the U.S government. The economic recession and many years deficit finance policy make the accumulate of the U.S. Debt. Latest data indicates that the U.S. debt to GDP ratio is increaed this year.(See appendix)
The third part of this essay will discuss the strengths and drawbacks of using PPBS and line item budgeting approaches in U.S. and discuss which is more appropriate under the management of the U.S. NPM.
The line-item budgeting allocate funds on the special projects or types of the expenditures, which are regarded as the main input to the administrative tasks. It is aim to strengthen the control of the budget accounts and outlays. In line-item budget, it includes the comparisons of the previous fiscal year revenue and expenditure, the next year’s expenditures also would be listed according to the objectives of the expenditures. Normally, the content of these items are very detailed and have a clear description on expenditures of some particular agency or staff salaries, fringe benefits, travel and equipment etc. The line-item budget is focus on defining the spending limit of items and ensure that the expenditures of all agencies do not exceed its allocated amount. (McCaffery and Jones, 2008)
The strengths of the system are its relative simplicity, clarity and the convenience with previous year for comparison purposes, as well as has a clearly defined purpose of expenditure to regulate expenditures and good at expenditure planing and control. However, the line-item budget can not satisfy the requirements required by the extend function of the government. In addition, the line-item budget can not provide the reasons for expenditures and also can not explain the efficiency and effectiveness of project implementation. Moreover, almost all items are for the short-term, resulting in people can not consider the medium and long term costs. What is more, the budgeting-making institutions and financial sector only focus on the micro-management of the implementation of department budget as pay more attention on the control of detailed items. It emphasizes the input rather than output. Transfer of the expenditure between projects is difficult and governors have little flexibility. (Riverbark and Kelly, 2010)
Unlike the line item budget, programme budgeting system(PPBS) directly uses the more funds on the completion and outputs of the actual policy objectives, together with the management reporting system and set performance indicators. In PPBS, the U.S. government firstly make the national development strategies, then convert the national development strategies into a specific program development plans, last transform the program to the national budget model. PPBS is developed on th basis of the performance budgeting, which is based on the objectives determined by the state and prepared through quantitative methods according to the programs. In addition, PPBS conducts the budget in accordance with the development strategies and programs, and considers the cost effectiveness of spending. It plays a great push role for improving the efficiency of the budget. ( Shackelford, Coletta and Bolt, 2005)
What is more, the expenditures are classified by program and link the various of programs toward to the identified policy objectives. Therefore it can break through the department boundaries and undertake unified design, and linking the results and inputs of the program together that helpful for improving the efficiency of the budget spending. Moreover, PPBS can combine the arranged items in the budget with the medium and long term plan of the government, it is helpful for government to conduct government activities. In the process of the selection and arrangement of items, it focus on analyse the cost-benefit, which requires the evaluation and analysis on the financial according to the data and compare the programs, thereby reducing the expenditures of each program and improving the utilized effect of the financial funds. In addition, many programs are beyond the year, arrange the budget on the basis of the programs can make adjustments on the objectives, plans and budget according to the situation. However, this budget system does not take the interests of the department inter-relationship. ( Flores and Boyle, 2010)
New public management is based on the management, performance evaluation and efficiency as a standard, it widely adopt management methods of private sector in the public sector and introduce the competition mechanism, while strengthening the adjustment of government functions, creating a good management performance and emphasis on the saving of the resource utilization. NPM requires the government attach importance to the output control and set goals and performance standards. ( Lane, 2000)
Under the NPM, compare with the line item budget, PPBS is more appropriate, it has overcome the shortcomings of line item budget. It re-defined the content of the line item budget, and link the content in a new context. Some analysis methods also been identified. PPBS reduces the central control of input appropriately, providing greater flexibility for management departments and agencies that can help governors fully utilize autonomy and innovation in the process of achieving goals.
Take U.S defence budget as an example, in the early 1960s, the U.S. military started to use PPBS to manage the defence resources and prepare defence budget. PPBS combined the long-term strategic planing, medium-term plans and annual budget together as a whole, and consider the strategy construction of military and funding from the perspective of long-term and overall situation. In addition, under PPBS, it is easier for analysts to compare the weapons program relative value of performing the same or similar tasks through using system analysis methods, through analyse investment returns to predict the relationships between the the different investment sizes and military growth. According to the statistics, during 1961-1968 years total saved about $15 billion defence spending. (Sigal, 1999)
After explaining the budget background of U.S., discussing the deficit and debt issues of U.S. and comparing the two budget approaches, it can be seen that due to the program budget can combine the long term plan of the government activities and the activities of annual budget planning, and using various quantitative analysis analyse the program, then choose the best budget program according the data of various cost and benefits. The line item budget make the political officials become a relatively minor role, while political officials get more sufficient information from program budget, which is actually helpful for strengthening the control. Under the management of the NPM, Program budget is more appropriate.
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