What Is Budget Reform?

Budget reform is pretty much what it sounds like – improving a budget. At the local and state levels, this can affect your quality of life and taxes as municipalities, counties and states expand or cut back services. As an investor, budget reform at the national level can impact the type of financial products you own. Understanding how budget reform can affect your investments will help you take steps to keep your portfolio protected and your gains optimized.

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What Is Budget Reform?

Budget reform typically refers to a government review and modification of its budgeting process. The budget process might stay the same, with reform limited to spending changes, such as limits on spending (e.g., a balanced budget). Budget reforms might focus on lowering or raising taxes, either for corporations or individuals or both. Budget reform might focus on changing the process of creating, voting on and sharing information about annual budgets.

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For example, when preparing budgets, legislators often have different committees and sub-committees that review and make recommendations about or approve budget items in specific areas. The more committees, the more complicated the process, the more expensive the process and the longer it takes to create and pass a budget.

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What Are Common Budget Reforms?

Budget reforms apply to the actual budget process, as well as to how money is collected and spent. For example, governments often want to uncomplicate budgets and streamline the process for creating and sharing them. Some governments want balanced budgets so that legislators don't spend more than the government takes in each year. Others argue that deficit spending that helps create new jobs will create new taxes, paying for the deficit while boosting the economy.

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The Bipartisan Congressional Budget Reform Act aims to change the budget resolution cycle for the Congressional budget to a ​two-year​ period, require Senate committees involved in taxation and spending to provide more detailed plans, work on deficit reduction, improve the opportunity for senators to offer amendments and require more public transparency during the process.

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How Does it Affect Investing?

Some budget reform deals primarily with how the government collects its revenue. This is usually in the form of taxes. Republicans have long argued that lower taxes stimulate the economy, while Democrats have argued that lower taxes result in more state taxation, cutting back social programs and increasing the national deficit.

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As an investor, you should definitely understand what a Republican-led federal government (presidency, House and Senate) might do, in terms of taxes and spending, and you should also know what the Democrats are likely to do if they control Congress.

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