THE FEDERAL BUDGET PROCESS - Research Paper Example

? Research Paper on the Federal Budget Process of the of the Management: Table of Contents Table of Contents 0 Abstract 2 INTRODUCTION 3 BODY 3 1.The History of the Federal Budget process 3 A.Changes made to the process 3 B.Current Budget Process 6 2.Social Security Being Affected 7 A.What percentage is spent on social security in the past to current? 7 B.How do we compensate our workers, if not with their due social security benefits? 10 3.How do we correct the deficit? 11 A.Where do we start? 11 B.The Human Factor In Question 13 4.Budget Cuts 14 A.Who get the cuts and when? 14 B.Is There Ever Going To Be Enough? 15 Conclusion 16 GRAPHS, CHART, VISUALS 17 References 19 Abstract The thesis statement of this research paper is to assess how the federal budget process is affecting social security, the deficit, and the budget cuts. The federal budget process encompasses procedures and rules ratified over the past century. In the mid-1980s, the principal goal of the process was to condense deficits. This translated to the implementation of regulations aimed at controlling deficits, while increasing economic growth aimed at generating surpluses by the end of the year 1990. Social security is translating to high federal budget deficits due to the large amount the federal government pays as benefits to the elderly. Budget cuts are a move consequently being taken by the federal budget process in bid to reduce its deficit. The research paper will concentrate on evaluating social policy, its alternatives, budget deficits and budget cuts with an aim of assessing how the federal process budget is affecting social security, deficit, and budget cuts. INTRODUCTION For the aim of this research paper, the federal budget described is the enacted budget, which is because of laws put in place to govern the assortment and utilization of funds. The enacted budget also encompasses the laws affecting expenditure and taxing in a given fiscal year that is voted for by Congress. In this regard, the federal budget process refers to the rules that govern the Congressional deliberation of tax legislation and expenses, and the Presidential bid (Anderson, Davis & Gullo, 2003). The thesis statement of this research paper is to assess how the federal budget process is affecting social security, the deficit, and the budget cuts. BODY 1. The History of the Federal Budget process A. Changes made to the process Prior to 1921 Changes made to the process entail how the federal budget process was prior to the three laws, which govern it today. To begin with, preceding the 1921 budget and Accounting Act, the federal budget process was at the discretion of the Congress. The Congress made decisions on how much it was willing to impose as tax, expenditures to be incurred, and if there was need to borrow funds. This bill was taking for presidential accent each year. The enacted federal budget process could then be transferred to the Executive branch that was bestowed with the responsibility of its execution (Fischer, 1975). Budgetary, fiscal, and economic evolutionary changes necessitated the need for a more coordinated federal budget process. This saw the birth of the Federal Reserve System in 1913 that was aimed at coordinating monetary policies, controlling money supply, and centralizing the regulation of the banking system (Anderson, Davis & Gullo, 2003). Budget and Accounting Act 1921 The Act necessitated the need for the President to tender a particular consolidated budget each year for consideration by the Congress in bid to developing a synchronized federal budget process. This Act also brought into implementation the Bureau of the Budget that was aimed at making the presidents’ means of generating a tender more efficient. Consequently, this Act brought to existence the General Accounting Office the aided in accountability checks of the Congress. In addition, this Act provided regulations that inhibited agencies from proposing for supplementary appropriations (Anderson, Davis & Gullo, 2003). Introduction of the social security fund following the world war 11 saw a reduction in the spending under this Act. Moreover, a remark by President Nixon in 1970s that he had the authority to decline spending of funds, which Congress had avowed, saw the birth of the next Act to cushion the Congress from such a move (Anderson, Davis & Gullo, 2003). Congressional budget and Impoundment Control Act 1974 This Act was aimed at strengthening the role played by the Congress in the budget making process and involved the addition of advisory committees to the Congress. The concurrent budget resolution was adopted by this Act that enhanced the Congress to deliberate on budgets that did not require the president’s signature but they were not laws. The concurrent budget resolution aided in providing the Congress with diverse options to its budget appropriations incase one did not gain presidential accent. This Act also saw the birth of recessions and deferrals that cushioned the Congress from the President’s ability to decline approval and this was only possible if they deliberated and accepted it (Anderson, Davis & Gullo, 2003). This Act was impartial to budget outcomes. It was not inclined to curb expenditure or deficit that had not existed prior to 1970. However, early 1980s saw an increase in the debt and federal deficits that called for a control measure to be implemented to curb it. This led to countless debates that saw the birth of the next Act, which was aimed at enabling the federal budget process to control and finally be in a position to eradicate these discrepancies (Anderson, Davis & Gullo, 2003). Balanced budget and Emergency control Act 1985 This Act saw the setting of annual declining targets that were aimed at cushioning the economy against deficits and increased expenditures. This saw the impounding of the looming social security fund and at times it was exempted from the budget process. This however translated to increased government taxes that were not effective leading to the development of the Budget Enforcement Act 1990. This saw a decline in the deficits, decrease in government spending, and an increase in the revenue that the government received (Anderson, Davis & Gullo, 2003). Budget Enforcement Act saw the surpluses of the federal budget process rise rapidly between 1998 and the year 2000. This was however, curtailed by the terrorist attack on September 2001, and all the surpluses were used in the war against terror. This deprived the federal budget process and the deficits crept in again. With the retirement of the baby boomer generation and increase in the social security to take care of the elderly, this will see the federal budget process account for more deficits. This necessitates the need for a federal budget process that takes this into account (Anderson, Davis & Gullo, 2003). B. Current Budget Process The provisions governing the current budget dates back 75 years and encompass three laws: Balanced Budget and Emergency Deficit Control Act 1985 being the most recent preceded by the1974 Congressional Budget and Impoundment Control Act, and the 1921 Budget and Accounting Act (Anderson, Davis & Gullo, 2003). The current federal budget process has been viewed as a political tool used by the politicians to pioneer their interests. However, besides the political relevance of the current federal budget process, it has four main functions. To begin with, the federal budget process is responsible for the development of the macro fiscal policy attained through the determination of the proportion of the federal surplus or deficit. This function not only benefits the government, but also aides in determining the economic stability of the country (Irving, 2002). Secondly, the federal budget process plays a role in setting priorities across the competing programs and projects requiring the allocation of the limited resources. Thirdly, the federal budget process plays a role in promoting the accountability of agencies responsible for the implementation of fiscal goals contained in the budget. Finally, the federal budget process has a function in promoting consideration of the impacts made by decisions accrued today as pertains to the budget, and economies of the prospect (Irving, 2002). The functions of the federal budget process have however been criticized and majority of them have not been attained. Of importance to note is the function aimed at reducing deficits in the economy. This has not been accomplished in the past as deficits have been recorded to triple from $161 billion in the year 2007, to $ 455 billion in the year 2008. Economic analysts have attributed this to the two wars that were continuing now, weakening of the economy, and the enactment of economic stimulus in 2008. This research paper is timely, as it is aimed at assessing how the federal budget process is affecting the social security, deficits, and the budgetary cuts (Posner, 2009). Policy makers have avowed that the economic stimulus will not be the solution to the federal budget process deficits. They voice long term issues the social security fund, retirement of the baby boom generation, increased in health care costs, budget cuts, and increase in taxes. For the federal budget process to accomplish its four functions equitably, the long term issues need to be addressed (Posner, 2009). That is why this research paper is committed to addressing the social security fund; following gaining an insight of the role it plays in influencing the deficits experienced by the federal budget process. 2. Social Security Being Affected A. What percentage is spent on social security in the past to current? Prior to evaluating the percentage spent on social security in the past to the current, it is important to first understand what social security means. Social security has been documented as the most renowned, enormously subscribed, and positively professed program, which is an initiative of the federal government. Social security plays a dire role in American’s economy as it not only serves as a retirement savings plan, it also works as a form of redistribution of wealth to the elderly, in bid to reduce poverty levels. Its benefits can be dated back to at least three quarters of the century, not only to the economy, but also to the government. However, the social security system has in the recent past been suffering from enormous financing problems. This was translated trough a survey that showed 68% of the workers in 2005 were skeptical of receiving their retirement benefits once they became retirees (Anders and Hulse, 2006). The social security befit payment scheme has its genesis from the early 1930s that was majorly meant to focus on assisting the elderly in the harsh economic conditions to which they were exposed. The United States unemployment rate had reached a significant 20% when the Social Security Act 1935 was enacted to become a law. The Act henceforth provided welfare initiatives, old age programs, unemployment insurance, and old age pension schemes. Social security played an important role in reducing poverty levels. This was statistically achieved as poverty rate among the elderly reduced to 10% in 2003, from 35% in 1959 with the elderly (65 years and above) constituting twice the Americans population as per the 2000 census (Anders and Hulse, 2006). Social security tax rates have increased to 15.3% in 2000, from 9.6% in 1970, which had increased from 2% in 1940. Following the increase in life expectancies of retirees, in bid to increase contribution to the social security fund, the government increased the retirement age from 65 to 67 in 1983. This was however to be effected for workers who turned 65 years between the years 2003 and 2025. Consequently, since the year 2000, any retiree aged 65 and 69 who continued to work, did not face any form of deductions (Anders & Hulse, 2006). The benefits received from the social security fund also took a paradigm shift. Benefits were previously in proportion to contributions made by the retirees during their employment period. However, in 1975, retirees received benefits that superseded the tax that they and their employers had paid. This was a result of an error in revenue projections made by the congress in 1972 and instead of earning the projected benefits, it translated to deficits. This led to the social security trust fund being declared bankrupt in the early 1982. The Congress in bid to salvage the situation purported to cut the benefits and raise the pay roll taxes in 1983 (Anders & Hulse, 2006). The current crisis and deficits experienced by the social security fund can also be attributed to an increase in participant of the social security fund. Initially, the initiative was meant to cover 50% of all workers in America. However, between the years 1946 to 1983, the workers to be included in the program were increased. This initiative now included armed forces members, workers of the agricultural sector, state government employees, and other federal employees. It is currently estimated that 96% of United States workers are contributors waiting to receive benefits from the social security fund (Anders & Hulse, 2006). In the early 1950s, the social security benefit payments accounted for less than 1 percent of the Gross Domestic Product as the ratio of Americans receiving social security was1:50. This peaked and was 5 percent in 1982. Currently, it is standing at 4.4 percent with the ratio of Americans receiving social security being at 1:6. It is speculated that government spending on social security fund will rise to 6.3 percent of the Gross Domestic Product by 2030 (Martin & Weaver, 2005). Currently, social security and Medicare expense account for one-third of federal government spending. This translates to $ 1.2 trillion for programs implemented for the disabled, elderly citizen, not forgetting the children and spouses of workers who are deceased (National Priorities Project, 2010) Figure 1. Currently, the social security fund taxes individuals who are employed at a rate of 7.65% of their earnings, in addition to a similar percentage paid by their employer to the fund, to account for 15.3%. The 7.65% taxed from the employee is apportioned to incorporate Disability Insurance (DI) of 0.9%, Old Age and Survivors Insurance (OASI) of 5.3%, with the remaining 1.45% accounting for Medicare system (HI). Self-employed individuals shoulder double the tax rates imposed on civil servants to the American government (Anders & Hulse, 2006). The social security fund employs the pay-as-you-go system where the current employees are meant to finance the program and help pay benefits for the already retirees. However, the financial challenges being encountered are not in any way ending in the near future. It is documented that in 1945 50 workers represented every retiree, this declined to 17 workers for every retiree in 1950. This ratio consequently declined to 8.6 workers for every retiree by 1960. It is currently estimated that 3.3 workers represent every retiree, which is estimated to decline to 2.2 by 2025. It is also speculated that by this time, 22% of the population will be entitled to social security benefit (Anders & Hulse, 2006). With the impending deficits and financial crisis facing the social security fund, there is need for the government to come up with alternative ways of compensating workers. B. How do we compensate our workers, if not with their due social security benefits? There have been reforms proposed to improve the financial position of the social security fund. These can be achieved through reduced benefits, increased revenues, or improving the rate of return on assets in the trust funds. Benefits can be reduced through raising the retirement age, mean testing, implementing cuts, and changing adjustments to incorporate inflation trends. Revenues of the social security fund can be increased through raising the tax rates, raising the amount of taxable income, incorporating taxation of all government employees, diverting tax revenues to trust fund, and increasing income taxes on benefits accrued to social security benefits. Rate of return on trust fund assets can be improved through allowing the social security fund to invest in other areas other than the United States government (Hayes, 2005). Commission approved by Congress compiled a report on alternatives to the social security benefit. Firstly, the commission documented an Individualized Retirement Account. This would serve as a saving account for the elderly where during their pre-retirement; they would be required to contribute $1, 500 per year. This amount would be disbursed to the following their retirement. Secondly, is implementation of the Mean Tested Assistance Payment. Unlike the Social Security benefit given to every elderly person, this alternative entails the federal government only giving the needy. Tests are carried out to determine if one is eligible (Alternatives to Social Security). Universal pension is the other alternative that seems to be the most efficient. This is since the retirement age is set at 70 years and this benefit acts as a health care program for the elderly. The main challenges of these alternatives remain the transition process without affecting those who have already contributed and are awaiting their benefits (Alternatives to Social Security). 3. How do we correct the deficit? A. Where do we start? The United States federal budget process was characterized by surpluses during the years 1998 to 2001. Following the 2001 recession, coupled with the decline in the economic activity lead to the creeping in of deficits. Consequently, income tax cuts and the war on terrorism led to the emergence of deficits in the federal budget process that have become rather difficult to do away with. These continued deficits have become a major economic concern for the United States. This has in turn adversely affected the interest rates especially the longer interest rate terms compared to the shorter rates of interest. The government does this in bid to attract investment from the financial market and consequently to have a competitive edge against their private company competitors (Gokhale & Smetters, 2007). Deficit of the 2011 financial year is projected at $1.26 trillion, representing the difference between $2.57 trillion revenue and $ 3.83 trillion spending. In comparison with the previous two years, there has been a considerable decrease in deficit from $ 1.6 trillion in 2010 and $ 1.4 trillion in 2009. To correct deficit, we commence from understanding the variables like GDP and unemployment that are responsible for the deficits experienced in a fiscal year. The political climate and the strategies employed by different governments play a role in correcting deficits experienced by the federal budget (Huber, Kocher and Sutter, 2002). Consequently, the Medicare and the social security is what accounts for the greatest deficit in the budget process. In 2006, it was estimated that that Medicare and social security accounted for $72.9 trillion shortfall in the United States federal budget, with the former being responsible for $65.2 trillion, and the former $7.7 trillion. The rising costs of health care services have been attributed to be the main contributor of increased in Medicare. This means that for the federal budget process to be in a position to address the deficit, it has to first incorporate the social security and the Medicare. This can be achieved using alternatives to social security foretold and decline in the cost of medical services. This can be achieved if the government concentrates more on preventive care than curative care that eats up to the overall medical costs (Gokhale & Smetters, 2007). B. The Human Factor In Question The human factor involved in deficits relates to the compensations to the elderly and also the cost incurred in financing their medical care. Human factor involved in ways to correct the deficits pertains to the loss in job. This is incurred following organizations move to lay of their employees in bid to reduce cost (Johnson, Oliff, and Williams, 2011). In addition, the human factors involved to correct the federal budget deficit are the retirees and the employed personnel. Statistics evidence that majority of the government employees are contributors of the social security fund and do not contribute to pension schemes. The federal government care ensures that all employees contribute to pension schemes and hence limit the beneficiaries that the social security fund has to finance (Gokhale & Smetters, 2007). Additionally, the current employees as the human factor involved in correcting federal budget deficit will have to bear with cuts and increased taxation. There is also a proposal to increase the retirement age to 67 to increase contribution to the retirement benefit funds. Increased in tax paid by employees will also lead to increase in revenue for the federal budget, aimed at offsetting the deficit. In addition, the implementation of cuts is creeping in, reducing the expenditure of the citizens in bid to finance the federal budget deficit. This justifies the need to address the issue of federal budget cuts, who gets them, and if there will ever be enough (Gokhale & Smetters, 2007). 4. Budget Cuts A. Who get the cuts and when? Budget cuts can be implemented in two forms: timing and size. Size entails the amount of expenses that is to be reduced from the previous expenses. Timing entails the length of period affected by the cut in size. Example: a 1% cut is economically and significantly different from a 10% cut. Consequently, a timing of 11 months is economically different from a fiscal year. Strategic budget cuts are defined as cutting a significant amount of budget, spread over a long period. Tactical cutting entails cutting small amounts over a short spread of time (Juszak, 2010). In strategic cutting, the decrease is spread over a long period. This allows for analysis and possible adjustments are made as compared to tactical cutting. Strategic cutting is based on the assumption that the current budget levels cannot be maintained. This cutting principle thrives on the proposition of stopping to do something completely. It also entails the continuation of strategic goals and mission, aimed at achieving the mission of the organization. This is different from tactical cutting that entails cutting everything then having inadequate performance in the consequent periods (Juszcak, 2010). Budget cuts are imposed on every citizen of the United States, affecting not only the employees, but also their families as it reduces on the income available for them to use on their expenditures. Budget cuts are also enacted in state services like: services to the disabled and elderly, education, and even health care services. These cuts came as a result of decline in revenues generated from taxes and following a decline in payment of services following recession. It is indeed evident that these cuts ensue from a reduction in revenues and following recession (Johnson, Oliff and Williams, 2011). Budget cuts are imposed in areas that have significant activities. This entails that the citizens will quit doing the things they used to previously do. This consequently translates to adjustment costs and both the agencies and the citizens need to find ways of dealing with these long-term cuts. There are also management strategies because of personnel issues; this is since it inculcates notification of all stakeholders to the imposed cuts. Cuts lead to significant changes in agencies, managing of the changes and success of the budget cut outcomes (Juszczak, 2010). Will there ever be enough of the cuts? This is the challenge that every citizen and agency is faced with. Moreover, the imposed cuts accompanied with uncertainties translate to the reduced expenditure among individuals and they opt to save for crisis (Juszczak, 2010). B. Is There Ever Going To Be Enough? There will never be enough but the federal agencies, the Congress can aid in assisting employees, and employment agencies equip themselves for the cuts. Budget cuts can be successfully addressed if the government implements the four features outlined in the 1990 President Clintons’ era following the downsizing of agencies. To start with, the federal leaders and the congress should explain to their employees the reason behind the budget cuts. This should aid in developing goals to flexibly fit within the cuts (Lunney, 2011). Consequently, planning should be done in advance before the cuts are implemented, as reactive planning to cuts is not the best alternative. Diversification is another strategy where the abilities and priorities of the workforce should be considered prior to the cuts. In finality, communication to employees is important before cuts are implemented so as to train them and equip them with the necessary skills to adapt to the cuts (Lunney, 2011). Conclusion The federal budget process has four main functions: responsible for the development of the macro fiscal policy attained through the determination of the proportion of the federal surplus or deficit. Secondly, the federal budget process plays a role in setting priorities across the competing programs and projects requiring the allocation of the limited resources. Thirdly, the federal budget process plays a role in promoting the accountability of agencies responsible for the implementation of fiscal goals contained in the budget. Finally, the federal budget process has a function in promoting consideration of the impacts made by decisions accrued today as pertains to the budget, and economies of the prospect. Federal budget process has evolved with time to accommodate the challenging economic situations. On relevance is the social security benefit, which has attributed to the increase in government deficit. This is since the federal government ends up incurring more expenses financing the elderly and compensating retired workers who are not bringing any income to the nation. The Congress has come up with alternatives to the social security benefit like the Individualized Retirement Account and Universal Pensions. Deficits in the federal budget process can be corrected by cutting on the expenditure and increasing the GDP every fiscal year. The federal budget process in bid to cushion itself has also implemented the budget cuts where there is less money in circulation affecting the individual expenditure. These cuts are also implemented in federal services like healthcare and education. Though there has been debate on the negative effects of the cuts, the role they play in cutting the deficit in the federal budget process is of significant value. Consequently, the alternatives to social security are of essence in reducing the deficits experienced by the federal budget process. 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Journal of Accountancy, 200(1), 41-44. Irving, Susan J. (2002). Budget Process: Extending Budget Controls (Testimony before the U.S. House Budget Committee, April 25). Washington, DC: Government Printing Office. GAO-02-682T. Johnson, N., Oliff, O., & Williams, E., (2011), An Update on State Budget Cuts, Centre on Budget and Policy Priorities, pp. 1-15. Washington, DC. Juszczak, T. (2010). Strategic budget cutting in federal agencies. Public Manager, 39(4), 44-47. Lunney, Kellie. (2011), Government Executive, "Clinton-era Government Downsizing Offers Lessons for Current Crisis." National Journal. Atlantic Media, Inc. Martin, P., & Weaver, D. (2005), Social security: A program and policy history. Social Security Bulletin, 66(1) 1-15. National Priorities Project. (2010). Bringing the Federal Budget Home. Retrieved November 8, 2011 from http://nationalpriorities.org/resources/federal-budget-101/budget-briefs/federal-spending/ Posner, P. (2009). Introduction to the mini-symposium on the federal budget process: The persistence of reform. Public Administration Review, 69(2) 207-210,177-178. Read More