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Government Spending
Economics Chapter 10
Did you know…
 Between 1962 and 1993, federal transfer
payments to people eligible for benefits
because of poverty rose from under 1
percent of the nation’s Gross Domestic
Product (GDP) to just about 2.5 percent. In
contrast, at the height of World War II (the
early 1940’s), federal spending on defense
was 40 % of GDP. In 2001 the total
government expenditures at all levels
amounted to about 30% of GDP.
Government Spending in
 Total government expenditures at all levels was almost 2.9
trillion in 2001 – about $10,300 for every American.
 Government spending did not begin to increase until the 1940’s
for three reasons:
1. the high costs of WWII,
2. the Great Depression changed public opinion about the
government assisting in everyday economic affairs and in improving
American’s economic welfare; and
3. the success of large-scale public works projects. (pg. 239)
 Debate continues over the role the government should plan in
the economy. Government promotes the broad social and
economic goals of Americans, but the benefits of a government
policy should outweigh its costs.
What government services do
you think might be better
provided by the private sector?
(see pgs. 244-245, and 248)
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.
 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-in-aid. Subsidies are payments
made to individuals or entire industries to encourage or
protect a certain economics activity.
Impact of Government Spending
 The federal budget consists of
mandatory spending which
includes interest payments on borrowed money, Social Security,
and Medicare (two-thirds of the budget); and
spending, which includes programs that Congress must approve
annually (1/3 of the budget).
 The government’s fiscal year is from October 1 to September 30
toward adopting a budget is executive formulation –
the president confers with his advisors and drafts a budget which
he submits to Congress.
is House action – Congress has the power to
approve, modify, or disapprove the president’s proposed budget.
The house sets budget targets for for each category of the
discretionary budget, then assigns appropriations bills to various
subcommittees where subcommittee members study and debate
each bill…
Establishing the Federal Budget –
part II
: 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 of each
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
 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
 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
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
major, city council, or country judge – to approve the
State Government Expenditures
 80% of state spending is directed toward
intergovernmental expenditures, public welfare,
insurance trust funds, higher education, highways,
hospitals, and interest on the public debt. The other
20% is spent on a variety of expenses, such as
corrections, health, natural resources, and utilities.
 What state universities does our state budget support?
Local Government Expenditures
 Local governments include counties, municipalities,
townships, school districts, and other special districts.
 The largest categories of spending (about 2/3s 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.
(pg. 250)
From the Deficit to the Debt
Throughout United States history, the federal government has
practiced deficit spending, or spending more than the
revenues it collected. 1998 the federal budget had its first
surplus in 29 years.
Historically, the largest federal deficits happened during WWII.
The budget, however, had a surplus by 1947, which lasted
until the 1980’s, when the Reagan administration increased
defense spending and cut taxes. It was not until after the
Omnibus Budget Reconciliation Act of 1993 that the deficit
began to shrink.
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.
From the Deficit to the Debt –
part 2
 The total federal debt had grown to 5.6 trillion by 1999. About
$1.9 trillion is trust fund money the government owes itself,
which economists do not include in the total as economically
 The federal debt differs from private debt because (1) we owe
most of the federal debt to ourselves, whereas private debt is
owed to others; (2) private debt typically has repayment
deadline, but federal debt does not; the government just issues
new bonds; (3) private debt means individuals give up their
purchasing power as they pay down their debt; but when the
federal government repays a debt, the funds transfer to others
who gain purchasing power (unless payment are to foreign
investors). (pgs. 254-256)
What is the difference between
the federal deficit and the
federal debt?
Impact on 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 collect.
 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. (pg. 258)
Taming the Deficit
 Congress tried to mandate a balanced budget in 1991 through
the Gramm-Rudman-Holling 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.
Taming the Deficit – part II
 Congress gave the president a line-item veto, but the
Supreme Court found it unconstitutional. The Balanced
Budget Agreement of 1997 followed, with rigid spending caps
so Congress could balance the budget by 2002. The caps
caused problems several years later, in 1999, when
Republicans in Congress wanted to increase defense spending
and cut taxes; as a consequence, they had to cut popular
programs such as health, education, and veterans’ programs.