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A Basic Difference in Budgeting

State and local governments make a sharp distinction between the operating budget and the capital budget. In that regard, their budgeting is similar to that of a corporation. The federal government makes no such distinction. In fact, determining how much of the federal budget is operating versus capital would be a major task. Some have suggested that requiring the federal government to distinguish between operating and capital expenditures would facilitate thinking more clearly about the federal budget but there has been no move to change the federal budget in this way.

The other way in which state and local government budgeting differs from that of the federal government is that the federal government does not operate under a balanced budget requirement. Many conservatives regret this. Those on the other side of the political fence may argue that a balanced budget requirement would make it impossible for the federal government to use its budget to stimulate the economy when needed. However, regardless of the arguments it does not.

Both state and municipal governments have gone bankrupt (though it has not been a common event for more than a century) which suggests that at the subnational level the balanced budget requirement makes sense. The federal government has never defaulted on its debt. In fact, some have argued that since the dollar is a reserve currency, meaning that our debts to other nations are denominated in dollars, and we print our own currency, the federal government could never go bankrupt. However, that argument takes us beyond the purview of this book.

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