Download Chapter 10: Government Spending


The Federal government
collects money (revenue) and
spends money.

The government is important in our economy.

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The circle graph shows that all levels of government combined account for
about 28%-nearly 1/3 of the nation’s total output. The bar graph shows that
federal spending accounts for nearly 2/3 of all government spending, or 18% of
the total output.
2. Transfer
Payments
1. Goods and
Services
•
• Planes, tanks, ships
space shuttles
•
• capital goods for
schools and libraries.
welfare
•
Unemployment
compensation
•
Medicare
• office buildings
• land for parks
Social Security
Grant in Aid:
Payment from one level of
government to another (ex.
federal govt to state govt)
Example: interstate
highways: Fed govt pays
most and state pays rest

The government expenditures have grown
since the 1940s
◦ WWII
◦ Change in public opinion that government should
have a large role in everyday economic affairs.
◦ TVA, low cost electricity to people in the south in
the 1930s
Fiscal year: 12-month financial planning period
October 1-September 30
2 TYPES OF GOVERNMENT SPENDING
1. Mandatory
Spending
Spending by law.
Congress does not
need to approve
Social Security
entitlements
Medicare
Medicaid
SSI
2. Discretionary
Spending
Spending that needs
to be approved each
year.
Military
Coast Guard
Welfare
Federal Government Expenditures
 The president is responsible for developing
the federal budget for the fiscal year which
begins on October 1 and ends Sept. 30.
◦ When the budget is complete, the budget is sent to
the House of Representatives.
October 1

The House only deals with
Discretionary
Military
Spending
Coast Guard
Welfare
Various committees in the
House decide how to spend the
money and propose
appropriation bills. House votes
on bill.
The budget is reassemble and
voted on by the House and
Senate.


Mandatory
Spending
is not part of the annual budget
process, although Congress can deal with its separately.


If differences between the House and the
Senate emerge, a compromise bill is
developed on which both vote.
The largest components of the federal are
social security, national defense, income
security, Medicare, net interest on the federal
debt.

State & Local Expenditures
◦ State and local levels of government also have
expenditures like at the federal
◦ These governments must approve spending before
revenue dollars can be released
◦ In most states it’s modeled after the federal
government

Approving spending
◦ Some states have enacted a Balanced budget
Amendment, Which is a constitutional amendment
that requires that annual spending not exceed
revenue
◦ When revenue drops….NO MORE SPENDING
◦ A reduction in revenues may occur if sales tax or
state income tax fall because of a decline in general
level of economic activity

State Government Expenditures
◦ Major types of SGE shown in the following picture
◦ 7 of the most important categories , accounting for
nearly 80% of all state spending are going to be
shown in the following picture
◦ The largest category of state spending….is….wait
for it….InterGovemental Expenditures; which are
funds that one level of government transfer to
another for spending.
◦ Comes from anything that’s taxable
◦ The 2nd largest is Public Welfare

Local Government Expenditures
◦ These include; Counties, Municipalities, townships,
school districts, and other special districts
◦ Largest amount of spending in local governments
is elementary & secondary education, utilities,
hospitals, police protections, interest on debt,
public welfare, and highway
◦ Schools are priories.
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Historically the federal budget has been
characterized by a remarkable amount of
deficit spending-or spending in excess of
revenues collected.
When the federal government runs a deficit, it
must finance the shortage of revenue by
borrowing from others.

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Federal budget deficits existed from 1970 until
1998 when the budget finally had a surplus.
Deficits add to the federal debt and the total debt
amount to $5.7 trillion in fiscal year 2001,
approximately $3.3 trillion of which is held by
the public.
The debt affects the economy in several ways
◦ Taxes are needed to pay the interest on the debt
◦ The distribution of income is altered
◦ Purchasing power is transferred from the private sector
to the public sector.
◦ Incentives to work, save, and invest may also be altered.
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Despite recent budget surpluses, the overall
federal budget would show a deficit if not for
the surpluses in the Social Security Trust
Fund.
The rapid growth of entitlements are still
threat to future budget surpluses.
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https://www.youtube.com/watch?v=gkJnmW
hin90
http://www.forbes.com/sites/realspin/2014/
04/15/passage-of-the-data-act-is-a-majoradvance-in-government-transparency/