Download How Budgets Interact with Economic Conditions

Carol W. Lewis and W. Bartley Hildreth, 2012. Budgeting: Politics and Power, 2nd ed. New York, Oxford University Press.
HOW BUDGETS INTERACT WITH ECONOMIC CONDITIONS (EXERCISE)
Budgeting affects and is affected by economic conditions (see box 1). Go to the president’s
budget office, OMB (http://www.whitehouse.gov/omb), and see how economics and budgeting
are intertwined in the president’s budget message.
Box 1. What is the Federal Budget?
“something that affects the Nation’s economy.
Some types of spending on things like education and support for science and technology are
done in the hope they will increase productivity and raise incomes in the future. Taxes, on the
other hand, reduce incomes, leaving people with less money to spend.
“something that is affected by the Nation’s economy.
When the economy is doing well, people earn more and unemployment is low. In this
atmosphere, revenues increase and the surplus grows.”
Source. OMB, 2002. A Citizen’s Guide to the Federal Budget, FY 2003. GPO: Washington,
D.C., p. 1.
Consider monetary policy, for example. According to the Federal Reserve
(http://www.federalreserve.gov/fomc), “The term ‘monetary policy’ refers to the actions
undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost
of money and credit to help promote national economic goals. The Federal Reserve Act of 1913
gave the Federal Reserve responsibility for setting monetary policy.” In inflationary periods, the
purchasing power of the dollar declines, the purchasing power of fixed revenues declines, and
the prices of goods and services rise. As a result, monetary policy is important to budgeting.
Carol W. Lewis and W. Bartley Hildreth, 2012. Budgeting: Politics and Power, 2nd ed. New York, Oxford University Press
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When answering the questions below, think about both the spending and the revenue sides of the
budget, and answer using specific categories of spending (such as social services, health care,
education, and public safety) and specific sources of revenue (such as the income tax, sales tax,
and property tax).
1. Go to the most recent The Economic Report of the President. How could changes in any three
economic conditions directly affect federal expenditures and revenues?
2. Go to the economic projections from the Congress’s nonpartisan, professional office, the
Congressional Budget Office (http://www.cbo.gov). How could changes in any three economic
conditions directly affect the federal budget?
3. Go to your governor’s economic report or, if it is not available online, then to another state
(such as Minnesota, Connecticut, or California). How could changes in any three economic
conditions directly affect state spending or revenues?
4. The Economic Research Unit of California’s Department of Finance “prepares economic
forecasts and analyses of various economic developments, advises state departments and local
government agencies, and provides economic information to the general public. The Economic
Research Unit prepares economic forecasts and analyzes”
(http://www.dof.ca.gov/research/economic_research_unit/index.php). Why do you think that
California’s governor includes economic projections in the budget summary? Go to
http://www.ebudget.ca.gov.
5. How could changes in personal income and gross domestic product directly affect state
budgeting? Go to http://www.bea.gov/regional/index.htm#gsp.
For personal income by state, go to http://bea.gov/iTable/iTable.cfm?reqid=99&step=1.
Carol W. Lewis and W. Bartley Hildreth, 2012. Budgeting: Politics and Power, 2nd ed. New York, Oxford University Press
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Note that income can be measured in several ways. “Personal Income is the income that is
received by all persons from all sources. It is calculated as the sum of wage and salary
disbursements, supplements to wages and salaries, proprietors' income with inventory valuation
and capital consumption adjustments, rental income of persons with capital consumption
adjustment, personal dividend income, personal interest income, and personal current transfer
receipts, less contributions for government social insurance. The personal income of an area is
the income that is received by, or on behalf of, all the individuals who live in the area; therefore,
the estimates of personal income are presented by the place of residence of the income
recipients” (Bureau of Economic Analysis,
http://www.bea.gov/regional/definitions/nextpage.cfm?key=Personal income).
6. Use the Web site resource, How Falling Housing Prices Affect Local Budgeting (), and the
budget of a large local government that relies on property taxes to explore how changes in the
value of housing could affect the budget of a local government.
7. Use the budget of your state capital to explore how changes in the unemployment rate could
affect local budgeting.
8. Go to http://www.federalreserve.gov/monetarypolicy/fomc.htm and
http://www.federalreserve.gov/pf/pf.htm. Why and how is monetary policy important to
budgeting?
Further Resources
Bureau of Labor Statistics, http://www.bls.gov/bls/inflation.htm, on price indexes and details
about their construction and proper use, see the U.S. 4
Carol W. Lewis and W. Bartley Hildreth, 2012. Budgeting: Politics and Power, 2nd ed. New York, Oxford University Press
Council of Economic Advisors, Economic Report of the President, annual,
http://www.whitehouse.gov/administration/eop/cea/economic-report-of-the-President and
http://www.whitehouse.gov/administration/eop/cea/economic-indicators.
Federal Reserve on monetary policy at http://www.federalreserve.gov/policy.htm.
Tobin, James (undated). Monetary Policy. Concise Encyclopedia of Economics (2002). Library
of Economics and Liberty, http://www.econlib.org/library/enc/MonetaryPolicy.html.
Web Site Resources
Analyzing the Costs of Public Programs
How Falling Housing Prices Affect Local Budgeting
Using the Consumer Price Index
Using the Gross Domestic Product to Measure the Role and Size of Government
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