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Government Spending
Chapter 10
Goals & Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
Explain how and why gov’t spending has increased since
the 1940’s.
Describe 2 kinds of gov’t spending.
Describe how gov’t spending impacts the nation’s
economy.
Explain the budgeting process.
Describe parts of the budget process.
Describe State and Local Spending categories.
Explain the federal deficit & debt.
Describe past attempts to lessen the debt.
Relate entitlements to the national debt.
The Economics of Government
Spending

2013: Federal, State, Local $4.7 Trillion
Per Capita: (per person) $12,000 for
every man, woman, and child in the U.S.
 Public Sector: 1942 Public Revenue Act

1. WWII
2. Public Opinion shifts toward Socialism.
3. Success of GDP with gov’t spending.
Public Jobs & Spending
WWII Economy & Gov’t Spending
Two kinds of Spending
1. Good and Services: tanks, planes,
ships, office supplies, military labor.
The Federal Government is the largest
American consumer.
 2. Transfer Payments: “a payment for
which the government receives neither
goods nor services in return”
(TINSTAAFL)

Types of Transfer Payments





1. Social Security
2. Welfare
3. Unemployment Compensation
4. Grant-in-aid:
Grant-in-aid: one level of government to the next
level: highway funds, public schools, food stamps,
welfare, subsidized housing, Obamacare.
Transfer Payments & States
Discretionary Spending “Façade”
Total Federal Spending 2013
Impact of Government Spending
1.
2.
3.
Affecting Resource Allocation: Tanks or Milk
subsidies?. Welfare or Disabled Veterans?
Redistributing Income: TANF, SDI, Food
Stamps, Pell Grants, NITC.
Competing with Private Sector: Public
College Costs increases with Pell Grant
increases. Obamacare mandates and health
insurance premiums/copays.
Food Stamp Nation
Entitlement Nation
Federal Government Expenditures

Federal Budget: a plan on how much to
spend.
– Mandatory Spending: without the Congress
(Interest on debt, SSA, Medicare)
– Discretionary Spending: Military & Welfare
Federal Budget Deficit: “Plan” to spend more
than receipts
 Federal Budget Surplus: “Plan” to receive
more tax revenues than expenditures.

House & Senate Budget
1.
House: Budget starts in the House of
Rep. Discretionary Spending only.
1. Appropriations Bill: act of Congress
authorizing agencies to spend money.
1. Committee/Subcommittee: Pork-Barrel
Spending
2.
Senate: Conference Committee & CBO
input or complete rewrite of bill.
Congress Budget Compared
State Government Expenditures

Intergovernmental expenditures:
Public Welfare, medical care, welfare
institutions, miscellaneous welfare
expenditures, higher education, highway
construction.
Grant-in-aid Spending
Deficits, Surpluses, and The
National Debt
 1. Deficit Spending: spending in
excess of revenues collected.
 2. Federal Debt: total amount
borrowed from investors to finance
the government’s deficit spending
 Balanced Budget Admendment:
constitutional limitation on spending
Presidential Deficits
Future Deficit Spending
17.6 Trillion -25 Trillion by 2020
Who do we owe?
Trust Funds
• Debt held in government trust funds:
special accounts used to fund: Social
Security, Medicare
• Al Gore’s Presidential Campaign 2000:
– “Lockbox”?
Trust Fund Debt
Public vs. Private Debt


Private citizens borrow there is a plan to pay
it back
Federal Government borrows there is no
thought about how, or when to pay it back:
–
–
1. Increase taxes to pay
2. Borrow more money to pay
Impact of The National Debt
 1. Impacts the distribution of
income: Gov’t borrows from the
wealthy and taxes the middle class to
pay for the interest on the debt.
 2. Transfer of purchasing power
from the private sector to the
public sector: The larger the debt
the more TAXES needed to pay off
the interest.
Debt as % of GDP
Impact of the National Debt
 3. Taxes needed to pay the
interest on debt: creates a
diminished incentive to work, save or
invest.
 4. Crowding-Out Effect:
Government borrowing takes money
out of circulation for the private
sector.
Taming the Deficit
1.
2.
1990: BEA,(Budget Enforcement Act)
pay-as-you-go provision: New spending
must accompany cutbacks in other
programs
Gramm-Rudman-Hollings: Balanced
Budget & limitation on spending failed in
the Congress. Why?
Taming the Debt
3. Omnibus Budget Reconciliation Act of
1993
1.
President Clinton: Reduce the rate of the
deficit not the deficit itself.
4. Balanced Budget Agreement of 1997:
Line-item veto: unconstitutional
Spending caps: legal limits on annual
discretionary spending.
Success---Failure
1. 2001 recession
 2. 2001 Terrorist Attack
 2. 2002-3 Wars in Afghanistan & Iraq


---Entitlements: Largest growth in
government spending.