I'd also say that it is a process that few (if any) economists really talk about. A simple example should illustrate my point as well as illuminate why businesses operate more efficiently than government.
How a manager determines his budget:
- Analyze the previous year's budget.
- Modify expenses based on changes in business practices - changes in headcount, maintenance costs, inflation, etc.
- Brainstorm all of the projects that you would like to complete for the entire following year.
- Work with several vendors for each project to determine likely costs associated with project completion.
- Complete Return on Investment and Total Cost of Ownership analysis on all proposed projects..
- Throw out all of the ones that don't pay for themselves in a reasonable amount of time.
- Show the proposed budget to your boss who tells you to cut 10%.
- Cut corners, make some dificult decisions, put off some projects until the following year.
- After showing the budget to your boss, he tells you that Marketing wants to do X, so you will have to budget for Y - and you aren't getting any more money to do it.
- You make all the changes, miraculously finding enough corners to cut to make it all work.
- Wait for the executive committee to approve all budgets - getting yours back 10% smaller than it was just a couple days ago.
- Sit back and have a glass of champagne - your 5% uplift was built into the legislation that created your department.