Download Fiscal Policy and The Federal Budget

Fiscal Policy and The Federal Budget
• Fiscal Policy – the use of government spending and revenue
collection to influence the economy
• Federal budget – a written document indicating the amount of
money the government expects to receive and how they will spend it
– Released the first Monday in February each year
• Fiscal year – 12 month period, October 1 – September 30
Creating The Federal Budget
• Step 1 – Federal agencies request money; spending
proposals are sent to the Office of Management and
Budget (OMB)
• Step 2 – The OMB works with the President to create a
budget, President presents to Congress
• Step 3 – Congress makes changes to the budget and sends
the amended budget to the President
• Step 4 – The President signs the budget into law
Step 1
→
Step 2
→ Step 3
→
Step 4
Federal Spending
• Mandatory Spending – programs that lawmakers are
required by existing laws to spend money on (Social
Security, Medicare, Medicaid, etc.)
• Discretionary Spending – spending that government can
adjust; increase or decrease (Defense, environment,
scientific research, etc.)
Mandatory Spending Programs
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Social Security – $730 billion
•Medicare – $491 billion
•Medicaid – $297 billion
TARP – $11 billion
Jobs Programs – $25 billion
Health Care Reform – Budget reduction of $17 billion
All other mandatory programs – $619 billion. These
programs include Food Stamps, Unemployment
Compensation, Child Nutrition and Tax Credits,
Supplemental Security for the Disabled and Student
Loans.
Mandatory and Discretionary Spending
Mandatory Spending
Description
Entitlements
Social welfare programs that people are “entitled to” if they meet certain
eligibility requirements.
Social Security
The largest category of federal spending. More than 50 million retired or
disabled people and their families and survivors receive monthly benefits.
Medicare
Serves around 40 million people, most over 65 years old. Pays for hospital
care and the costs of physicians and medical services.
A program that benefits low-income families, disabled and elderly people in nursing homes.
Largest source of funds for medical and health related services for people within the poverty
threshold.
Medicaid
Other Mandatory
Spending Programs
Food stamps, supplemental security income and child nutrition, retirement benefits
and insurance for federal workers, veterans pensions and unemployment.
.
Discretionary
Spending
Description
Defense Spending
Pays the salaries of people in the army, navy, air force, marines and
civilian employees. Largest portion of discretionary spending.
Other Spending
Education, training, scientific research, student loans, technology,
national parks and monuments, law enforcement, environmental
cleanup, housing.
Discretionary Spending Programs
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$495.6 billion for the base budget. The President also requested $85.4 billion to wind
down the War in Afghanistan. It's funded by Overseas Contingency Operations and is
outside the Budget Act.
Health and Human Services - $73.7 billion.
Education - $68.6 billion.
Veterans Administration - $65.3 billion.
State Department - $42.6 billion.
Homeland Security - $38.2 billion.
Housing and Urban Development - $32.6 billion.
Energy Department - $27.9 billion (includes $11.7 billion for the National Nuclear
Security Administration).
NASA - $17.5 billion.
Justice Department - $27.3 billion (includes $17.6 billion for the FBI and
cybersecurity)
Transportation - $14 billion.
Treasury - $12.4 billion.
Interior - $11.5 billion.
Budget Deficits and the National Debt
• Balanced budget – money going into the U.S. Treasury is the same
amount of money going out
– Revenue = Spending
– The last balanced budget occurred in 1997 under
President Bill Clinton
Balancing the Budget
• Budget Surplus – occurs when the government takes in more
than it spends
– Revenue > Spending
• Budget Deficit – occurs when the government spends more
than it takes in
– Revenue < Spending
Dealing with a Budget Deficit
• Create money – the government can print or inject money
into economy
• Borrow money – government borrows money by selling bonds
– Bond is a type of loan with a promise to repay with interest
– Bonds sold domestically or globally
– China owns 1 trillion dollars in U.S. bonds
The National Debt
• National debt – the total amount of money the federal
government owes to bondholders
• Budget deficit – the amount of money the government owes
to bondholders in one fiscal year
• Who does the United States owe money to?
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/who-owns-us-national-debt-30-sept-2010.png
• US Debt Clock
http://www.usdebtclock.org/
Expansionary and Contractionary Fiscal Policies, pgs. 389-390
Word
Definition
Description
Expansionary Fiscal
Policies
1. Purpose
2. Increase in
government
spending
3. Cutting Taxes
Contractionary
Fiscal Policies
1. Purpose
2. Decrease in
government
spending
3. Increasing Taxes
Tools of Fiscal Policy Chart
Fiscal Policy
Expansionary/
Contractionary
Explanation
1. The government cuts
business and personal
income taxes and
increases its own
spending.
Expansionary
Decreased taxes increase C & I.
Increase in government spending increases
2. The government
increases the personal
income, Social Security
and corporate income tax.
Contractionary
I & C decrease because of the tax increase.
Shifts AD to the left.
3. Government spending
goes up while taxes remain
the same.
Expansionary
Higher government spending without a
corresponding rise in tax receipts increases
Taxes and Government Spending
What are Taxes?
• Tax – a required payment to a local, state, or
national government
– Income, sales, property, capital gains, etc.
• Revenue – income received by the government
from tax collection
• Tax Base – income, property, good or service that is
subject to a tax
Tax Structures
• Proportional Tax – % of income taxes remains
the same for all income levels (Flat tax)
It’s the same percentage for all.
$40,000 income vs. $140,000 income
10% on $1000 = $100, Who has more in the
end?
• Progressive Tax – % of income paid in taxes
increases as income increases (Federal
Income Tax)
“The more you make the more they take”
• Regressive Tax - % of income paid in taxes
decreases as income increases (Sales Tax)
6% tax on a can of beans for the $25,000 and
the $125,000. Who does this impact more?
Characteristics of a Good Tax
1. Simplicity – easy to
understand, keep records,
prepare tax forms, anticipate
amount of taxes
2. Efficiency – easy to collect,
taxpayers should not pay too
much or take too much time to
pay
3. Certainty – clear due dates,
amount to be paid, how to pay
4. Equity – fair, so not one person
bears too much or too little of
the tax burden
Individual Income Taxes
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•
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“Pay-As-You-Earn” Taxation – taxes are paid based on
annual income; individuals pay income taxes throughout
the year
Tax Withholding – tax payments taken out of employees
pay before they receive it; ensures annual payment
Tax Return – form used to file income taxes; declare
income and taxable income
Corporate Income Taxes
•
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FICA (Federal Insurance Contributions Act) – funds Social Security and
Medicare.
Social Security – funds people of old-age, survivors and disabilities,
established in 1935, originally to provide old-age pensions of workers
Medicare – national health insurance program that helps pay for
people over age of 65 or with certain disabilities
Medicaid – national health insurance for people within the poverty
threshold
Unemployment – insurance for workers laid off through no fault of
their own
Other Types of Taxes
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Excise tax – tax on gasoline, cigarettes, alcohol, phone service,
cable, internet, etc.
Estate tax – “death tax”, tax on estate or value of money and
property of a person who has died
Gift tax – tax on money or property that one living person
gives to another; a person can give up to $10,000 a year taxfree per individual
Tariff – import tax on foreign goods brought into the country
• Out of the 3.5 Trillion dollars of U.S. federal budget, break down in
percentages the amount that you think should go towards the following
areas of the economy:
Category
Percentage
Allocated
Dollars
Social Security
19.63
$ 695 billion
National Defense
18.74
$ 664 billion
Unemployment/
Welfare
16.13
$ 571 billion
Medicare
12.79
$ 453 billion
Medicaid
8.19
$ 290 billion
Interest on Debt
4.63
$164 billion
Education
1.32
$ 46.7 billion
Other
18.0
$ 635 billion