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GRAPHIC ORGANIZER
Federal Deficit
INFOGRAPHIC
The Deficits and the Debt
POLITICAL CARTOON
Lower Taxes vs. Reduced Deficits
VIDEO
Lesson 2
Fiscal Policy
GAMES
ESSENTIAL QUESTION How does government influence the economy and
economic institutions?
It Matters Because
Government spending is an important part of the economy, with
lasting effects for all citizens.
PHOTO: (tl) Bob Daemmrich/Corbis; (tc) Andre Jenny/Alamy; (tr) Bill Pugliano/Getty Images
NGSSS covered in
“Surpluses and Deficits”
SS.7.E.1.2 Discuss the importance of
borrowing and lending in the United States,
the government’s role in controlling
financial institutions, and list the
advantages and disadvantages of using
credit.
SS.7.E.1.6 Compare the national budget
process to the personal budget process.
SS.7.E.2.1 Explain how federal, state, and
local taxes support the economy as a
function of the United States government.
LA.7.1.6.1 The student will use new
vocabulary that is introduced and taught
directly.
LA.7.1.7.3 The student will determine the
main idea or essential message in
grade-level or higher texts through
inferring, paraphrasing, summarizing, and
identifying relevant details.
Reading HELP DESK
Surpluses and Defici ts
GUIDING QUESTION What do governments do when the budget does not balance?
Making a government budget is one thing. Following it is
another. A budget, after all, is based on what officials predict, or
forecast, will happen in the future. The unexpected can happen,
however. An international conflict may break out, which
may result in increased spending for defense. If heavy rains
strike the Great Plains and cause massive flooding, the federal
government will face the cost of helping the people who have
homes that are damaged or destroyed.
Government officials know that disasters can happen and
build funds into the budget to cover them. But what if more or
bigger disasters than expected occur? What if a disaster is so
terrible that it uses the government’s entire disaster relief fund?
What does the government do when, later that year, another
crisis strikes?
Revenue forecasts can also go wrong. For example, if the
economy slows, some workers will lose their jobs. In that case,
income tax revenue will be lower than expected.
Taking Notes: Cause and Effect
As you read, complete a chart to identify
the causes and effects of a federal
deficit. SS.7.E.1.2
Content Vocabulary
Causes
Federal
Deficit
Effects
• balanced budget • debt • automatic
• budget surplus • fiscal
stabilizer
• budget deficit
policy
Lesson 2 613
Balanced—or Unbalanced
Some of the federal budget is used to
fund education. This money may
support programs for teachers, like
this one (second from right), and their
students.
Most governments strive to have a balanced budget, in which
revenues and spending for the year equal each other. As you
read in Lesson 1, every state except Vermont has to have a
balanced budget. States can borrow money to invest in longterm projects but not to fund regular programs.
Most states save money during good times so that they have
a cushion when revenues fall. States can save money in years
in which they have a budget surplus. A budget surplus occurs
when a government collects more money than it spends. In
another year, if revenues fall, then states can use the reserves
they saved to balance the budget. Of course, they also have the
option to cut spending.
The federal government is different. It is allowed to have
a budget deficit , or spend more than it collects in revenues
in a fiscal year. To make up the difference, the federal
government borrows money by selling bonds or Treasury bills.
A government bond is a contract in which the government
promises to repay borrowed money with interest at a specific
time in the future. Most government bonds are repaid in 10 to
30 years. The government also sells Treasury bills, or T-bills. It
promises to repay these in one year or less.
▲
Reading HELP DESK
Academic Vocabulary
predict to forecast
Deficit Becomes Debt
Budget deficits create debt because the government is
borrowing money to cover some of its spending. Debt is money
that has been borrowed and not yet
paid back. Each year that the federal
government runs a deficit, its total
debt goes up. The line graph here
shows the level of federal debt
in recent years. It illustrates
that the federal debt has
been rising steadily for
many years. If the federal
government runs a surplus
one year, it can use the extra
money to pay down the debt.
A budget surplus, then, can
cause the federal debt to
become smaller.
balanced budget
an annual budget in which
expenditures equal
revenues
614 Financing the Government
budget surplus a
situation that occurs when a
government collects more
revenues than it spends
budget deficit a
situation that occurs when
a government spends more
than it collects in revenue
debt money
borrowed and not
yet paid back
PHOTO: Bob Daemmrich/Corbis
CRITICAL THINKING
Making Connections How would cuts
in spending on education affect you?
UNITED STATES DEFICITS AND SURPLUSES
400
200
0
IN BILLIONS OF DOLLARS
-200
-400
-600
-800
-1000
Surplus
-1200
Deficit
-1400
-1600
-1800
1980
1985
1990
1995
YEARS
2000
2005
2010
UNITED STATES NATIONAL DEBT
IN BILLIONS OF DOLLARS
16,000
33.3%
31.3%
12,000
Debt Distribution, 2010
Debt held by government accounts
Debt held by foreign investment
Debt held by public
35.4%
8,000
4,000
0
1980
1985
1990
1995
2000
2005
2010
YEARS
Source: U.S. Bureau of the Census, Statistical Abstract of the United States
I NFOGRAPHIC SKILLS
Over the years, the federal government has
relied on borrowing to cover spending. As a
result, the federal debt has increased rapidly.
SS.7.E.1.2
CRITICAL THINKING
1 Analyzing Visuals In which years did the
federal government have a budget surplus?
2 Making Inferences How did the federal
government respond, in terms of spending,
to the recession that began in 2007 and
worsened in 2008? How can you tell?
Lesson 2 615
Impact of Deficits and the Federal Debt
Borrowing by the federal government has several negative
effects. First, the yearly interest cost drains the federal budget.
As you read in Lesson 1, more than 6 percent of the budget goes
to paying interest. As the debt rises and the interest cost goes
up, the federal government has less to spend on other programs.
More borrowing has another effect. Government bonds are
seen as safe ways to invest money, so they are popular. The
more money that people invest in bonds, however, the less they
have to invest in businesses. Businesses will have less money
to grow and to invest in improving productivity. Slow business
growth and low productivity cause slow economic growth.
Federal borrowing can also drive up interest rates as a result
of supply and demand. The more the government borrows, the
less money consumers and businesses can borrow. When the
supply of credit decreases, its price—the interest rate on loans—
goes up. If you take out a loan to buy a car, more government
borrowing could result in the loan costing more than it would
otherwise.
A recent report by the Congressional Research Service points
out another problem. If a high level of debt continues for a long
time, investors could lose confidence in the government. The
government would be forced to borrow at higher interest rates.
It might also be forced to cut spending or to sharply raise taxes.
PROGRESS CHECK
Making Generalizations For the most part, has the federal government had
a balanced budget, a surplus, or a deficit over the last two decades?
▲
PHOTO: 2010 Keefe, The Denver Post, and PoliticalCartoons.com
Politicians often pledge to both cut
taxes and cut the deficit. Cutting taxes
without reducing spending increases
the deficit, so the first pledge works
against the second.
CRITICAL THINKING
Analyzing Visuals In the cartoon, why
does the train have two locomotives
pulling in opposite directions?
LA.7.1.7.3
Reading HELP DESK
Academic Vocabulary
achieve to reach
616 Financing the Government
fiscal policy how the government uses
taxes and spending to reach economic goals
During the Great Depression, WPA workers
(left) built roads. Such projects were
designed to stimulate the economy.
Florida’s Daytona Beach Bandshell (above)
was also a WPA project. It is still used
today to host concerts and weddings.
Managing the Economy
GUIDING QUESTION How does the government try to influence the economy?
For much of U.S. history, the government had a limited
economic role. It left most matters to consumers and businesses.
Then, in the 1930s, the government’s economic role changed.
Franklin Roosevelt became president in 1933. The Great
Depression had been going on for nearly four years, and
millions of people were suffering. Roosevelt decided that the
nation could not wait any longer for the economy to recover.
The government had to act. Roosevelt started new government
programs to put people back to work. These programs paid
people to build schools, post offices, bridges, parks, and more.
The new programs helped the economy. Later, when America
entered World War II, the economy grew even stronger as
people produced supplies for the military.
After the war, the economy began to focus on consumer
goods. To make sure the nation did not fall back into depression,
the government’s economic role grew again. In the late 1940s,
Congress passed a law that set the first official economic goals.
The three goals were to keep people working, to keep producing
goods, and to keep consumers buying goods and services.
Two policies aimed to achieve, or reach, these goals. One is
a monetary policy handled by the Federal Reserve System. The
other is fiscal policy. This refers to how the government uses
taxes and spending to reach economic goals. The government
spending by President Roosevelt is an example of fiscal policy.
▲
PHOTO: (tl) Bettmann/CORBIS; (inset) Andre Jenny/Alamy
CRITICAL THINKING
Making Inferences What were two ways
that WPA projects helped the country during
the Depression? LA.7.1.7.3
NGSSS covered in
“Managing the Economy”
SS.7.E.1.2 Discuss the importance of
borrowing and lending in the United States,
the government’s role in controlling
financial institutions, and list the
advantages and disadvantages of using
credit.
SS.7.E.2.1 Explain how federal, state, and
local taxes support the economy as a
function of the United States government.
SS.7.C.2.3 Experience the responsibilities of
citizens at the local, state, or federal levels.
21st Century
SKILLS
Interpreting Points of View
In 1933, when Roosevelt took
office, 25 percent of all workers
were out of work. Unemployment
brought suffering and sometimes
starvation. On the other hand,
from the 1920s to the 1940, the
number of government workers
doubled to more than a million
people. Use these facts to write a
few sentences in which you argue
for or against Roosevelt’s
recovery programs. LA.7.1.7.3
Lesson 2 617
Using Fiscal Policy to Achieve Goals
The idea behind fiscal policy is simple. If the
economy slows down or enters a recession,
the government can take certain steps to
help the economy grow and become healthy
again. Such steps could include increasing
spending, cutting taxes, or a combination of
the two. Using fiscal policy to boost growth
is called stimulating the economy.
By boosting spending, the government
creates demand for goods and services.
That increase in demand could convince
businesses to produce more and perhaps to
hire back workers they had laid off. Cutting
taxes puts more money in people’s pockets.
That also can lead to increased demand.
A White House Council director meets
with a worker at Detroit Edison in
Michigan. The government awarded
an $83 million grant to this company.
It will create jobs by making
energy-efficient electric meters for
homes. The grant was part of the
American Reinvestment and Recovery
Act of 2009.
▲
CRITICAL THINKING
Making Inferences Why might it be
hard for Congress to agree on what
programs to fund?
Reading HELP DESK
Fiscal policy comes with problems, however.
Some leaders believe that deficit spending
hurts the economy. In 2009 President Barack
Obama wanted to boost the economy by
increasing spending. Critics protested about
the increases to the federal debt.
Even when leaders agree to pursue a stimulus program, they
may disagree on how much to spend or on which programs
should be funded. Supporters of the 2009 bill argued for some
time over these questions, resulting in a delay in putting the
programs into effect.
Fiscal policy can also be slow to take effect. It can sometimes
take months for Congress and the president to agree on a
spending plan. Then, still more time is needed to put the plan
into action. By the time the money is spent, the state of the
economy may have changed.
Another problem is the difficulty in judging if a stimulus has
worked. After the 2009 stimulus package, unemployment was
held lower than in some earlier recessions. As a result, many
economists agreed that the stimulus package saved jobs. They
could not identify exactly how many jobs were saved, though.
Finally, the effects of fiscal policy are not entirely predictable.
The economy is huge and complex. Any action might not be
Reading Strategy: Summarizing
To summarize, you find the main idea of a passage and restate it, reducing
the number of details. Read about the problems with fiscal policy. On a
separate sheet of paper, summarize the reading in one or two sentences.
618 Financing the Government
automatic stabilizer any economic
feature that works to increase or preserve income
without additional government action
PHOTO: Bill Pugliano/Getty Images
Problems with Fiscal Policy
strong enough to have the desired effect or effects, or it might
have unexpected effects—perhaps even negative ones.
Automatic Stabilizers
Why It
MATTERS
Government Spending
For these reasons, the government likes to use programs called
automatic stabilizers. These programs work to increase or
preserve income without the need for the government to take
additional action. Since automatic stabilizers increase income,
they can boost demand and spur economic growth. The two
most important stabilizers are unemployment insurance and
the progressive income tax system. A big advantage of both is
that they are always in place. As a result, they begin to work
automatically whenever the economy starts to slow down.
Think about how unemployment insurance works. In a
recession, millions of people lose their jobs. When they are
unemployed, they become eligible to receive unemployment
insurance payments. Using these insurance payments,
unemployed workers can then pay their bills and meet their
basic needs, such as food and shelter, until they are rehired or
find a new job.
Because the federal income tax is progressive, it also works
as a stabilizer. When people work less or even lose their jobs,
their income goes down. The less income people earn, the less
they pay in taxes.They are taxed at a lower rate and can keep a
larger percentage of their income. This partly offsets the loss of
income. When the economy recovers and they go back to work,
they begin to make more money. Then, when they can better
afford it, they are again taxed at a higher rate. That, in turn,
helps lower the deficit caused by the recession.
When Congress works on a
stimulus package, your local
representative often works to get
federal funding for programs in
your area. Think of a local
program or project that you
think would benefit your
community. Then write a few
lines to your member of
Congress explaining why you
think your community should
get federal funding for it.
SS.7.C.2.3
PROGRESS CHECK
Analyzing Cause and Effect Under what conditions does the government use
fiscal policy? Why?
LESSON 2 REVIEW
Review Vocabulary
1. What are the differences among a balanced budget,
a budget deficit, and a budget surplus? LA.7.1.6.1
2. How are budget deficits related to debt?
LA.7.1.6.1
3. How are automatic stabilizers related to fiscal policy?
LA.7.1.6.1
Answer the Guiding Questions
4. Contrasting How do state and federal governments
react to an unbalanced budget? SS.7.E.1.2
5. Synthesizing What policy can Congress and the
president use to influence the economy? How
effective is it? SS.7.E.1.2
6. PERSUASIVE WRITING As a member of Congress,
you must consider a bill sent by the president
cutting income taxes in the hope of stimulating the
economy during a tough recession. Write a short
speech for or against the president’s plan. Give
reasons for your position. SS.7.E.2.1
Lesson 2 619