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CHAPTER 10
GOVERNMENT SPENDING
Key Terms
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per capita
public sector
private sector
transfer payment
grant-in-aid
distribution of income
federal budget
mandatory spending
discretionary spending
fiscal year
federal budget surplus
federal budget deficit
appropriations bill
medicaid
balanced budget amendment
intergovernmental expenditures
deficit spending
federal debt
balanced budget
trust fund
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crowding-out effect
pay-as-you-go provision
line-item veto
spending cap
entitlement
CHAPTER INTRODUCTION
SECTION 1
The Economics of
Government Spending
SECTION 2
Federal Government
Expenditures
SECTION 3
State and Local
Government
Expenditures
SECTION 4
Deficits, Surpluses, and
the National Debt
Section 1: The Economics of Government Spending
• Chapter Objectives
• Explain why and how government expenditures have
grown since the 1940s.
• Describe two kinds of government expenditures
• Describe how government spending impacts the
economy.
– per capita
– public sector
Key Terms – private sector
– transfer payment
– grant-in-aid
– distribution of income
Section 1 Introduction
• Government is big business in America.
• In fact, all levels of government in the United
States spend more than all privately owned
businesses combined.
• Government is a major player in our economy
due to its enormous expenditures.
Two Kinds of Spending
• Government spending is for the purchase of
goods and services and payments to
disadvantaged Americans.
• Goods and services that the government buys
includes everything from tanks for the nation’s
defense to paper and soap for its employees.
Two Kinds of Spending (cont.)
• Transfer payments include Social Security,
welfare, and unemployment compensation.
Two kinds of transfer payments exist. If the
payment is made from one level of
government to another, it is called a grant-inaid. Subsidies are payments made to
individuals or entire industries to encourage
or protect a certain economic activity.
Impact of Government Spending
• Government spending affects resource allocation
because purchase decisions, subsidies, and
transfer payments either stimulate economic
activity or affect the factors of production.
• Government spending influences income
distribution when transfer payments increase
family incomes, federal projects provide or take
away jobs, and subsidies give income support to
American workers.
• Government spending creates competition with
the private sector.
Section 2: Federal Government
Expenditures
• Chapter Objectives
• Explain how the federal budget is established.
• Describe the parts of the federal budget.
Key Terms
– federal budget
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mandatory spending
discretionary spending
fiscal year
federal budget surplus
federal budget deficit
appropriations bill
medicaid
Section 2 Introduction
• Taking action on spending bills is but one step
in the preparation of the federal budget — an
annual plan outlining proposed revenues and
expenditures for the coming year.
• Approximately two-thirds of the federal
budget consists of mandatory spending—
spending authorized by law that continues
without the need for annual approvals of
Congress.
Introduction (cont.)
• Mandatory spending includes interest
payments on borrowed money, Social Security,
and Medicare.
• The remaining one-third of the budget deals
with discretionary spending– programs that
must receive annual authorization.
• Discretionary spending decisions include how
much to spend on programs such as the
military, the Coast Guard, and welfare
Establishing the Federal Budget
• The federal budget consists of (1) mandatory
spending, which includes interest payments on
borrowed money, Social Security, and medicare (twothirds of the budget); and (2) discretionary spending,
which includes programs that congress must approve
annually (one-third of the budget).
• The government’s fiscal year is from October 1 to
September 30.
Establishing the Federal Budget (cont.)
• The second step is House action—Congress has
the power to approve, modify, or disapprove the
president’s proposed budget. The House sets
budget targets for each category of the
discretionary budget, then assigns appropriations
bills to various subcommittees where
subcommittee members study and debate each
bill. If the bill is approved in subcommittee, it is
sent to the full House Appropriations Committee.
If approved there, it goes to the entire House for
a vote. All these congressional steps must be
completed by September 15 each year.
Establishing the Federal Budget (cont.)
• The third step is Senate action—the Senate
may approve the House bill or it may draft its
own version. If differences exist, a joint
House-Senate conference committee works
out a compromise bill.
• The last step is final approval—the House and
Senate send the bill to the president for his
approval or veto. Once signed, it becomes the
official budget for the new fiscal year.
Major Spending Categories (cont.)
• Mandatory spending categories include:
Social Security; income security; medicare;
interest on the federal debt; some health
programs; and veterans’ benefits.
• Discretionary spending categories include;
education, employment, social services,
transportation, administration of justice,
natural resources, and the environment.
the five largest components of federal
government spending.
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Social Security
national defense
income security
Medicare
net interest on the federal debt
Section 3: State and Local
Government Expenditures
• Chapter Objectives
• Explain how state and local governments approve
spending.
• Identify the major categories of state government
expenditures.
• Identify the major categories of local government
expenditures.
Key Terms
– balanced budget amendment
– intergovernmental expenditures
Section 3 introduction
• State and local levels of government, like the
federal government, also have expenditures.
• Like the federal government, these
governments must approve spending before
revenue dollars can be released.
• The budget process at the state and local
levels can be just as complicated as it is at the
federal level.
Approving Spending
• Most states approve their budgets using a
process similar to the federal government’s
process.
• Some states have a balanced budget
amendment that requires annual spending
not to exceed revenues.
• Local governments empower
representatives—the mayor, city council, or
county judge—to approve the budget.
Local Government Expenditures
• Local governments include counties,
municipalities, townships, school districts, and
other special districts.
• The largest categories of spending (about twothirds of the total) include: elementary and
secondary education; public utilities; hospitals;
police protection; interest on debt; public
welfare; and highways. The other third includes
such expenses as housing and community
development, fire protection, and parks and
recreation.
7 Categories of State Spending
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intergovernmental expenditures
public welfare
insurance trust
higher education
Highways
Hospitals
interest on debt
7 Categories of Government Spending
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elementary and secondary education
public utilities
police protection
Hospitals
interest on debt
public welfare
highways
Section 4: Deficits, Surpluses, and
the National Debt
• Chapter Objectives
• Explain how the federal deficit is related to the federal
debt.
• Relate the impact of the federal debt on the economy.
• Describe past attempts to eliminate the federal deficit.
• Describe entitlements.
Key Terms
•deficit spending
•federal debt
•balanced budget
•trust fund
•crowding-out effect
•pay-as-you-go provision
•line-item veto
•spending cap
•entitlement
Section 4 Introduction
• In 1998 the federal budget had its first surplus
in 29 years.
• The surplus did not last long, however, as the
recession of 2001 reduced tax receipts while
politicians simultaneously opted for tax cuts
rather than debt reduction. By 2002, federal
deficits were back.
From the Deficit to the Debt
• The federal budget has been characterized by a remarkable
about of deficit spending – or spending in excess of revenues
collected.
• Sometimes the government is forced to spend more than it
collects and other times they plan it.
From the Deficit to the Debt (cont.)
• When the budget runs a deficit, the Treasury
Department sells bonds to the public to raise money.
The federal debt is the total amount the government
has borrowed from investors to finance its deficit
spending over its long history.
• The debt grows whenever the government spends
more than it collects in revenues.
• If the federal government attains a balanced budget
the federal debt will not change.
*balanced budget : where expenditures EQUAL revenues
From the Deficit to the Debt (cont.)
Figure 10.8
From the Deficit to the Debt (cont.)
• The federal debt differs from private debt
because:
• we owe most of the federal debt to ourselves, whereas
private debt is owed to others
• private debt typically has a repayment deadline, but federal
debt does not; the government just issues new bonds
• private debt means individuals give up their purchasing
power as they pay down their debt
*when the federal government repays a debt, the funds
transfer to others who gain purchasing power (unless
payments are to foreign investors).
Impact of the National Debt
• The federal debt causes a transfer of purchasing power
from the private to the public sector. The larger the
federal debt, the larger the interest payments, and the
more taxes the government must pay.
• If taxes are increased to make the federal debt’s
interest payments, it may diminish incentives for
Americans to work, save, and invest.
• In selling bonds to raise money, the federal
government competes with the private sector for
scarce resources, leading to higher-than-normal
interest rates (Crowding-Out Effect)
Taming the Deficit
• Congress tried to mandate a balance budget in 1991
through the Gram –Rudman-Hollings Act. GRH failed
because Congress passed spending bills in spite of the
law.
• The Budget Enforcement Act required that Congress
must “pay as it goes.” It must offset any new spending
with making reductions elsewhere. BEA failed.
• The Omnibus Budget Reconciliation Act of 1993 only
succeeded in reducing the rate of growth of the deficit,
not the total deficit. The act combined spending
reductions with tax increases, leading to the surplus by
1998.
Entitlements
• Definition: broad social programs that use
established eligibility requirements to provide
health, nutritional or income supplements to
individuals.
– Types entitlement programs:
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Social Security
health benefits
aid to the poor
unemployment compensation
Medicaid
federal employee retirement
*The rapid growth of entitlements are still a threat to future budget
surpluses.