I’ve been trying to wrap my head around the new tax law and I realize I need to educate myself on a few basics first. This biggest and probably most fundamental is understanding the concept of government budget.
As a mom managing a family budget, I’ve learned that the formula for success is to spend less, earn more and save for a rainy day. The great thing about a family budget is that I only have to consult one other person before adding or subtracting from the budget. This is a huge advantage when needing to make adjustments.
I also have a business degree and have worked for several companies. The business budget’s basic formula for success is to spend money in order to make more money and work towards efficiency. Reducing waste and being efficient is what often gives companies the competitive edge to remain profitable.
The United States government’s budget can’t adjust as quickly as a family budget and doesn’t reduce waste naturally like a business budget. To better explain why, let me start by stating the formula for success. The government’s budget should be agreeable, predictable, and in the most ideal situation – balanced. A balanced budget means the government is collecting as much money as it is spending.
Why does the government have the goal of an “agreeable” budget? The government budget gets discussed and determined by Congress and then signed by the President. If Congress can’t agree on a budget, the budget doesn’t get passed. If the budget doesn’t get passed, the government shuts down and we waste a lot of money and get nothing done. Agreeing on how to spend our money is very important.
Why does the government have the goal of a “predictable” budget? Politicians are expected to tell the American people how much they need to pay in taxes to cover all of the expenses on the budget. They are also under pressure to keep spending reasonable so that taxpayers are not overburdened with unnecessary costs. The best way to determine taxes and make sure there is the right amount of money to cover it all is through predictable budgets.
Why does the government budget need to be “balanced’ , i.e. money in = money out? The government is expected to account for every dollar spent. If money is regularly left over, taxes should go down. But it’s quite a hassle to change tax laws, so it’s in the government’s best interest to simply absorb any cost savings into some other department. If government does need to reduce spending, it’s a simple matter of cutting the budget.
This brings me to a common complaint I hear when chatting with people about the government’s budget. Most departments and agencies within government spend every dollar they get. There are no incentives for cost savings. Why doesn’t the government strive to be more efficient?
Because the government is not a business and it’s not a family.
Imagine with me for a moment that my husband asks me exactly how much money I’ll need for groceries for the month of January. He doesn’t want to have to work extra hours and would rather just work enough to pay our bills and nothing more. I’m not exactly sure how much everything is going to cost but I estimate my food budget should be around $500.
As the end of the month approaches, my husband checks in with me to see how I’m doing. I look through the receipts and find that I’ve only used up 75% of the budget and our shelves are well stocked. He stays home the rest of the month since we have everything we need.
In February, my husband decides that since I did so well saving, he’s going to change my budget to $375, the amount I spent the previous month. He’s happy because that means he doesn’t have to work as much and he can spend more time with the kids.
Except…. during the month of February we have a birthday party and our regular brand of milk is out of stock. I’m forced to buy the more expensive brand, which is almost twice the cost. Because of these factors combined with others, the food budget is spent within the first 14 days. Now we don’t have any food money left for the rest of the month. My husband calls in to work and asks for extra hours to cover the rest of our food expenses. He’s not happy because he thought he had extra time to take the kids fishing.
By March I’m tired of playing around. I didn’t like being stuck in February. I decide to set the food budget at $800. My husband argues that it’s too high. He doesn’t want to have to work that much, especially if we really don’t need to spend that much for food. There’s also the issue that my husband’s employer is starting to get slightly annoyed with all of the adjustments to the work schedule. Exasperated, I lower my budget back to $500 and my husband agrees.
Throughout March, I watch my spending closely and though I take advantage of sales, I’m conscious that I need to have a predictable budget so that by the end of the month my husband has worked just enough hours to cover the budget and we have enough food throughout the month. The last day of the month, I make one final run to the grocery store and bring the budget total to exactly $500. My husband is happy because he only had to work those set number of hours, and I’m happy because I didn’t run out of money at the end of the month. Agreeable, predictable, balanced. Success!
That’s how the government’s budget is designed to work. Tax payers don’t want to pay more than they have to. Government doesn’t want to get stuck in the middle of a budget cycle with no money. Inefficient, yes. But agreeable and predictable.
Obviously there are more complicated things to discuss such as borrowing, fixed and variable expenses, etc. We’ll get there. But for now, what has helped you better understand the government’s approach to budgeting?