Download Chapter 10 - Duluth High School

Federal Government
Expenditures
Establishing the Federal Budget
• Federal Budget
– An annual plan outlining proposed revenues
and expenditures for the coming year
– Consists of:
• Mandatory Spending
• Discretionary spending
• Fiscal Year: 12 month financial plan
– Starts October 1st ends September 30th
Establishing the Federal Budget
• Federal budget consist of:
– Mandatory Spending includes:
•
•
•
•
interest payments on borrowed money
Social Security
Medicare
Makes up 2/3 of the budget
– Discretionary Spending includes:
• Programs that Congress must approve
• Makes up 1/3 of the budget
Establishing the Federal Budget:
Step One
• Executive Formulation
– President establishes the general budget
guidelines for a multiplayer year period
• Primary focus is on the upcoming fiscal year
– President confers with his advisors
– Drafts a budget
– Submits it to congress (request)
– Must send budget to congress by the first
Monday in February
Establishing the Federal Budget:
Step One
• George Bush’s federal budget
– $1,922 billion of federal revenues
– $2, 229 billion in mandatory and discretionary
spending
– The budget showed a Federal budget Deficit
• An excess of expenditures over revenue
– Federal Budget Surplus
• Expenditures is less than revenues
Establishing the Federal Budget:
Step Two
• Congress can modify, approve, or disapprove
the budget
• House Action
– debates discretionary spending
– Sets budget targets
– Assigns appropriations bills to sub committees (study
and debate each bill)
– Approved = House Appropriations Committee
– Approved = entire House votes on Bill
– Must be completed by September 15th
Establishing the Federal Budget:
Step Three
• Senate Action
– May approve as sent by the House or draft its
own version
– If differences exist = joint House-Senate
committee to work out a compromise
Establishing the Federal Budget:
Final Step
• If bill is approved by both House and
Senate
– Sent to President for signature
– May or may not be original budget proposal
he sent
– President can
• Veto
• Sign bill
Major Spending Categories
• Mandatory Spending:
–
–
–
–
Social security
Income security
Medicare
Interest on the Federal
Budget
– Health programs
– Veterans’ Benefits
• Discretionary
Spending
–
–
–
–
–
Education
Employment
Social services
Transportation
Administration of
Justice
– Natural resources
– Environment
State and Local Government
Expenditures
Approving Spending
• Most States approve their budgets similar
to federal government’s process
• Some States have Balanced Budget
Amendment
– Constitutional amendment that requires that
annual spending nor exceed revenues
– Cut spending when revenues drop
Approving Spending
• Local Governments: power to approve
spending
– Mayor
– City council
– County judge
– Elected representative or body
• If unable to raise revenue then deal with
inadequate resources
State Government Expenditures
• 80% of budget
– Intergovernmental
expenditures
– Public welfare
– Insurance trust funds
– Higher education
– Highways
– Hospitals
– Interest on public
• 20%
–
–
–
–
Corrections
Health
Natural resources
Utilities
Local Government Expenditures
• Local Gov’ts include
– Counties
– Municipalities
– Townships
– School districts
Local Government Expenditures
• 2/3 budget
– Elementary and
secondary education
– Public utilities
– Hospitals
– Police protection
– Interest on debt
– Public welfare
– Highways
• 1/3 budget
• Housing and
community
development
• Fire protection
• Parks and recreation
Deficits, Surpluses, and The
National Debt
From the Deficit to the Debt
• US History
– Gov’t practiced Deficit Spending
– 1998 gov’t has first surplus in 29 years
• Deficit spending: spending in excess of
revenues collected
– Planned deficit spending
– Forced deficit spending
From the Deficit to the Debt
• Historically:
– Largest during WWII
– 1947- 1980 budget surplus
– Reagan cut taxes but increased defense
spending
– 1993: Omnibus Budget Reconciliation Act
deficit began to shrink
From the Deficit to the Debt
• Treasury Department sells bonds to public
to raise money
– Federal Debt = total amount the government
has borrowed from investors to finance its
deficit spending
– Total Federal Debt has grown $6.74 trillion by
2003
– $1.9 trillion is trust fund money
From the Deficit to the Debt
• Federal Debt
– Owe most of federal
debt to ourselves
– No repayment
deadline
– Repays debt , funds
transfer to others who
gain purchasing power
(exception foreign
investors)
• Private debt
– Owed to others
– Repayment deadline
– Individuals give up
their purchasing power
as they pay down their
debt
Impact of National Debt
• Federal Debt impacts distribution of
income
• FD causes a transfer of purchasing power
from private to public sector
• Larger the FD = larger interest payment;
more taxes a government MUST pay
• Taxes needed to pay interest payments =
reduction in the incentive to
– Work, save, and invest
The publicly held portion of the federal debt was $3.9trillion in 2003. The total federal debt in that
year was about $2.8 trillion higher, so the total debt amounted to $6.7trillion. Why do economist
regard the public portion of the federal debt as the economically relevant part of the debt?
Impact of National Debt
• Selling bonds to raise
money = Federal
gov’t competing with
private sector
– Leads to higher
interest rates
• Crowding-out effect
– The higher than
normal interest rates
that heavy government
borrowing causes
Crowding out affects the allocation of resources in
the economy. What happens to the interest rate
when deficit spending increases?
Taming the Deficit
• 1991: Congress tried to mandate a
balanced budget (Gramm-RudmanHollings [GRH])
• Key : set federal deficit targets for the
president and Congress
• Failed for two reasons:
– Congress discovered they could pass
spending bills
– Economy started to decline in July 1990
Taming the Deficit
• Budget Enforcement Act of 1990
– Required Congress must “pay as it goes”
– MUST offset new spending with cuts/reductions
elsewhere
• Omnibus Budget Reconciliation Act of 1993
–
–
–
–
Reduced the rate of growth of the deficit (not total)
Combined spending reductions with tax increases
Lead to a surplus in 1998
Congress gave the president line-item veto, Supreme
Court declared it unconstitutional
Taming the Deficit
• The Balance Budget Agreement of 1997
– Rigid spending caps (tried to balance the
budget by 2002)
– 1999: Congress increase defense spending,
cut taxes
• Cut popular programs: health education, and
veteran’s programs
– 2001: recession, War on Terrorism, continued
growth of entitlements
– Led to record budget deficits