Government budgets reflect the priorities of policymakers. They specify what programs and activities the government will support and how to raise the money needed to fund them. These choices have far-reaching consequences that affect all members of society. Decisions about government spending are at the heart of democratic governance. Accordingly, the budget process must operate with fairness, integrity, and credibility.
Budget decisions can have significant effects on the economy since government spending represents a substantial share of all national spending. And fiscal and monetary policies influence investment and other decisions of the private sector. The reverse is also true: the private economy affects government budgets. It can alter the demand for services and cause fluctuations in taxable income.
The recession caused by the COVID-19 pandemic illustrates this interdependence. Many people lost their jobs. Some businesses closed as a result of restrictions on business activities. This increased demand for government services at the same time that tax revenue was reduced. And in turn, it strained state budgets. And when state governments have to cut services and lay off workers due to budget constraints, this can reinforce the economic downturn.
This chapter outlines key components of policies related to Budget and the Economy, including budget balancing, entitlement spending, budget processes and mechanisms, and responses to recessions.