Download 12EPP Chapter 10

Chapter Introduction
Section 1: The Economics of
Government
Spending
Section 2: Federal, State, and
Local Government
Expenditures
Section 3: Deficits, Surpluses,
and the National Debt
Visual Summary
Have you ever wondered
what the government does
with the money withheld from
your paycheck? As you travel
from home to school over the
next three days, list all the
examples you see of goods
and services provided by
federal, state, or local
government. Try to determine
which level of government
funded them and who
benefits from them the most.
Share your list with the class.
Governments are formed to
maintain order and regulate
activities in a geographic
area.
Section Preview
In this section, you will learn that the role of the
federal government has grown, making it a vital
player in the economy.
Content Vocabulary
• pork
• public sector
• private sector
• transfer
payment
• grant-in-aid
Academic Vocabulary
• constituents
• reluctant
• subsidy
• distribution of
income
Does government spending impact
your everyday life?
A. Yes
B. No
A. A
B. B
0%
A
0%
B
The Economics of Government
Spending
• Pork is a popular trend used by politicians
to satisfy their constituents.
• Taxpayers generally would not approve of
projects otherwise.
Government Spending in
Perspective
The government spends its
revenues on goods, services,
and transfer payments.
Government Spending in
Perspective (cont.)
• Spending by the public sector has
increased sharply since the Great
Depression.
– Change in public opinion gave
government a larger role in daily
economic affairs.
– Massive government spending funded
the U.S. involvement in World War II.
Government Spending in
Perspective (cont.)
• Some question which goods and services
government should provide versus what
the private sector should provide.
Government Spending in
Perspective (cont.)
• Government makes two kinds of broad
expenditures:
– Purchase of goods and services
– Transfer payment
• Grant-in-aid
Government Spending
Who would pay for the construction
of a new public library?
A. Grant-in-aid
B. Private sector
C. Transfer payment by
U.S. Government
D. Local taxpayers
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Impact of Government Spending
Government spending has a
direct impact on our
economy.
Impact of Government Spending (cont.)
• Government spending influences
– Resource allocation—if government
withdraws subsidies to farmers,
resources become available to other
industries.
– Distribution of income
– Production in the private sector
– Tax burden increases
How do government spending
decisions affect how resources are
allocated?
A. Directly
A. A
B. B
C. C
A
0%
0%
B
C. Both directly and indirectly
0%
C
B. Indirectly
Section Preview
In this section, you will learn that governments
provide money for many services and programs.
Content Vocabulary
• federal budget • budget surplus • Medicaid
• fiscal year
• mandatory
spending
• appropriations
bill
• discretionary
spending
• budget deficit
• Medicare
Academic Vocabulary
• ambiguity
• coincide
• balanced budget
amendment
• intergovernmental
expenditures
There is a lot of talk about a national
health-care system. Would you be in
favor of this if your taxes had to
increase drastically to pay for it?
A. Yes
A. A
B. B
C. C
A
0%
0%
0%
C
C. Possibly
B
B. No
Federal, State, and Local
Government Expenditures
• The federal budget contains a fair amount
of ambiguity.
• Economy’s growth, slow down, or any
unanticipated spending has an impact on
the rough estimate of revenues and
expenditures contained in the federal
budget.
Federal Government Expenditures
The federal government
establishes a budget and
allocates funds accordingly.
Federal Government Expenditures (cont.)
• The federal budget spans a fiscal year
beginning each October 1st.
• Office of Management and Budget (OMB)
prepares federal budget.
• Budget forwarded to House of
Representatives—reviewed by specific
house committees
• House subcommittees prepare
appropriations bills.
Federal Government Expenditures (cont.)
• After hearings and debates, appropriations
bills are voted on.
• Eventually forwarded to entire House for
a vote
• Senate acts on bill after House has
approved it.
• Senate may approve as is or draft own
version.
Federal Government Expenditures (cont.)
• Joint House and Senate conference
committee works out compromises.
• Compromised bill, approved by House and
Senate, is forwarded to president for
signature.
• If budget bill was altered too much,
president can veto it and congress
rewrites.
• If approved, budget becomes official for
next fiscal year.
Federal Government Expenditures (cont.)
• Federal budget leads to a budget deficit
or a budget surplus.
The Federal Budget for Fiscal Year 2010
Federal Government Expenditures (cont.)
• Federal budget expenditures include
– Social Security—considered mandatory
spending
– National defense—considered
discretionary spending
– Income security
– Medicare
Federal Government Expenditures (cont.)
• Federal budget expenditures include
– Health—Medicaid
– Net interest on debt
– Other expenditure categories
Profiles in Economics:
Alice Rivlin
Which is not an expenditure of
income security?
A. Food stamps
B. Education
C. Foster care and adoption
assistance
D. Mental health services
A. A
B. B
C
0%C. 0%
D. D
A
B
0%
C
0%
D
State Government Expenditures
At the state level,
expenditures include public
welfare and higher education.
State Government Expenditures (cont.)
• Unlike the federal government, some
states have a balanced budget
amendment.
• States must cut spending when
revenues drop.
State Government Expenditures (cont.)
• State government expenditures include
– Intergovernmental expenditures
– Public welfare
– Insurance trust and retirement
– Higher education
– Other expenditures
State and Local Expenditures
Which category accounts for
expenditures related to operating a
state prison?
A. Public welfare
0%
0%
D
0%
C
A
B
C
D
0%
A
A.
C. Intergovernmental expendituresB.
D. Other expenditures
C.
D.
B
B. Insurance trust
Local Expenditures
Local governments spend
money mainly on education,
utilities, and public safety.
Local Expenditures (cont.)
• Local governments’ expenditures are
– Elementary and secondary education
– Utilities
– Public safety and health
– Other expenditures
The Global Economy & YOU:
International Education Spending
Schools account for how much of all
local government spending?
A. 10%
B. 23%
C. 37%
D. 55%
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Section Preview
In this section, you will learn that deficit spending
has helped create a national debt.
Content Vocabulary
• deficit
spending
• per capita
• line-item veto
• national debt
• crowding-out
effect
• spending cap
• balanced
budget
• “pay-as-you-go”
provision
• trust funds
Academic Vocabulary
• mandate
• instituted
• entitlement
With the staggering number of
individuals who want government
services, is it really possible to have
a balanced budget?
A. Yes
A. A
B. B
A
0%
0%
B
B. No
From Deficits to Debts
Because of deficit spending,
the national debt has
increased dramatically.
From Deficits to Debts (cont.)
• Typically, deficit spending is a result of
the government forced to spend more than
it collects because of unexpected
developments causing a drop in revenues
or a rise in expenditures.
The Federal Deficit and the National Debt
From Deficits to Debts (cont.)
• When the federal government runs a
deficit, it must finance the revenue
shortage by selling U.S. Treasury notes
and other securities to the public.
• The national debt is equal to all
outstanding federal notes, bonds, and
other debt obligations.
• A balanced budget does not change the
national debt.
From Deficits to Debts (cont.)
• A portion of the national debt is money the
government owes itself as in trust funds.
• Two alternative views of the total
national debt
– Debt as a percentage of GDP
– National debt computed on a per capita
basis
From Deficits to Debts (cont.)
• Differences between public and
private debt
– Country can never go bankrupt—most of
debt is owed to itself.
– Repayment—new bonds are issued to
pay off old bonds.
– Little purchasing power is given up.
Who is ultimately responsible for the
growing deficit?
A. Members of Congress
B. President
C. Taxpayers
D. Future generations
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Impact of the National Debt
The national debt affects the
distribution of income and
transfers purchasing power
from the private to the
public sector.
Impact of the National Debt (cont.)
• The national debt, although mostly owed
to ourselves, still affects the economy by
– Transferring purchasing power from
private sector to public sector
– Reducing economic incentives
– Causing a crowding-out effect
– Redistributing income
Two Views of the National Debt Held by the Pubic
The government’s borrowing of
money can cause
A. Interest rates to increase
B. Interest rates to decrease
B
A
A. A
B. B
C. C
0%
0%
0%
C
C. Interest rates to remain
the same
Reducing Deficits and the Debt
Congress has tried a number
of measures to reduce deficits
and the national debt.
Reducing Deficits and the Debt (cont.)
• Concern over deficit spending led to
attempts to control it.
– Congress mandated a balanced budget.
– “Pay-as-you-go” provision
– Line-item veto and spending caps
– Raising revenues
– Reduced spending—difficult because of
entitlements
Reducing Deficits and the Debt (cont.)
• Action to reduce budget deficits and the
national debt will depend on the willpower
of Congress to make unpopular and
difficult choices.
The Size of the National Debt
What factors must change in order to get a
grip on the national debt?
A. Attitudes on entitlement must change.
0%
0%
0%
D
0%
C
D. Taxes must increase.
A
B
C
D
B
C. Society must engage in a savings
philosophy instead of a spending
philosophy.
A.
B.
C.
D.
A
B. Politicians must stop favoring their
pork projects and think of everyone’s
welfare.
Federal Budget Process Each year, the president
sends a federal budget to Congress. The budget
undergoes a lengthy approval process until it is
signed into law.
Major Budget Categories The major budget
categories vary for federal, state, and local
governments. The focus of the federal government is
on nationwide programs and expenditures. States
pass on much of their budget to local governments
and spend the rest on state-level programs. Local
governments focus their expenditures on local needs.
Surpluses, Deficits, and Debt When revenues
exceed expenditures, governments enjoy a budget
surplus. If revenues are less than expenditures,
governments are faced with a budget deficit. They
then have to borrow money to meet expenditures
and incur debt.
Alice Rivlin (1931–
)
• founding director of the
Congressional Budget Office
• served as director of the
White House Office of
Management and Budget
from 1994 to 1996
• vice chair of the Federal
Reserve Board from 1996
to 1999
pork
a line-item budget expenditure that
circumvents normal budget
procedures and benefits a small
number of people or businesses
public sector
that part of the economy made up of
local, state, and federal governments
private sector
that part of the economy made up of
private individuals and businesses
transfer payment
payment for which the government
receives neither goods nor services
in return
grant-in-aid
transfer payment from one level of
government to another that does not
involve compensation
subsidy
government payment to encourage or
protect a certain economic activity
distribution of income
way in which the nation’s income is
divided among families, individuals,
or other designated groups
constituents
persons who are represented by an
elected official
reluctant
hesitant or unwilling
federal budget
annual plan outlining proposed
expenditures and anticipated
revenues
fiscal year
12-month financial planning period
that may not coincide with the
calendar year
appropriations bill
legislation authorizing spending for
certain purposes
budget deficit
a negative balance after expenditures
are subtracted from revenues
budget surplus
a positive balance after expenditures
are subtracted from revenues
mandatory spending
federal spending authorized by law
that continues without the need for
annual approvals by Congress
discretionary spending
spending for federal programs that
must receive annual authorization
Medicare
federal health-care program for senior
citizens, regardless of income
Medicaid
joint federal-state medical insurance
program for low-income people
balanced budget amendment
constitutional amendment requiring
government to spend no more than it
collects in taxes and other revenues,
excluding borrowing
intergovernmental
expenditures
funds that one level of government
transfers to another level for spending
ambiguity
uncertainty about meaning or value
coincide
to happen or exist at the same time or
in the same position
deficit spending
annual government spending in
excess of taxes and other revenues
national debt
total amount borrowed from investors
to finance the government’s deficit
spending
balanced budget
annual budget in which expenditures
equal revenues
trust fund
special account used to hold
revenues designated for a specific
expenditure such as Social Security,
Medicare, or highways
per capita
per person basis; total divided by
population
crowding-out effect
higher-than-normal interest rates and
diminished access to financial capital
faced by private borrowers when they
compete with government borrowing
in financial markets
“pay-as-you-go” provision
requirement that new spending
proposals or tax cuts must be offset
by reductions elsewhere
line-item veto
power to cancel specific budget items
without rejecting the entire budget
spending cap
limits on annual discretionary
spending
entitlement
program or benefit using established
eligibility requirements to provide
health, nutritional, or income
supplements to individuals
mandate
to order or require
instituted
put into action
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