Chapter 10 Sections 2,3 & 4 By: Colette Spencer

Federal government has two kinds of spending: 1) goods and services Tanks, planes, space shuttles Office buildings, supplies Wages to government workers

2) transfer payments A payment for which the gov’t does not get any goods or services in return Social Security, welfare, unemployment compensation, aid for people with disabilities Grant-in-aid = transfer payment from federal gov’t to state or local gov’ts Example: money to cover part of interstate or building a school State and local gov’ts have to pay the rest

Federal Budget = the annual plan outlining proposed revenues and expenditures for the coming year Revenues = money coming in Expenditures = money being spent

Federal budget made up of two types of spending: Mandatory spending = spending that continues each year without approval by Congress Examples: Social Security, Medicare Makes up 2/3 of budget Discretionary spending = programs that must receive annual authorization Examples: military, agriculture, education Makes up 1/3 of budget

Fiscal year = Oct. 1 to Sept. 30 Steps: 1) proposals - agencies of the bureaucracy submit a detailed estimate of their needs to the OMB 2) the OMB (Office of Management & Budget) holds meetings where reps from the agencies explain why they want that amount 3) OMB works with staff of president to combine it all in a single package the president submits to Congress by first Monday in Feb.

4) Congressional debate begins in the House House sets a target for all discretionary spending Committees hold hearings about different proposals Final numbers for agencies are approved Appropriations bills = acts of Congress that allows agencies to spend money for specific purposes – set to subcommittees

After it is approved in the House, the budget is sent to the Senate Budget must be complete by September 15 5) Budget sent to president for signature or veto If not approved, the gov’t could shut down If approved, it goes into effect Oct. 1 Actually 2010 Budget

Thousands of individual expenditures can be grouped into broad categories: 1) Social Security – old age and disability 2) National defense – weapons, vehicles, salaries, nukes 3) Income security – retirement to railroad workers, coal miners, military, housing & food for poor 4) Medicare – health care to ALL senior citizens 5) Interest on national debt

6) Health Medicaid, OSHA, AIDS & cancer research, substance abuse treatments, etc. 7) Education & social services 8) Transportation 9) Veteran’s benefits 10) Administration of justice 11) Natural resources & environment 12) Other

Some states have a balanced budget amendment – spending must not exceed revenue State spending: Most state spending comes from intergovernmental expenditures Distributed to towns and counties Cover education and city functions 2 nd largest is pubic welfare Cash to poor, medical care, institutions 3 rd is insurance trust Retirement and insurance money for state employees

4 th largest is higher education 5 th largest is highway construction Local gov’t expenditures: Counties, cities, school districts Largest source of spending is on education 2 nd largest is public utilities Water, sanitation 3 rd largest is police protection 4 th largest is hospitals

Deficit spending = spending in excess of revenues collected Usually unexpected developments cause this to happen (ex: war) If the federal gov’t runs a deficit, it has to borrow money Sell bonds to citizens Federal debt = total amount borrowed from investors to finance gov’t deficit spending Goal is a balanced budget = annual budget where expenditures equal revenues

1900 – national debt was $1.3 billion 1929 – 16.9 billion 1940 – 50.7 billion (New Deal) 2002 – 6.7 trillion 2012 – 15 trillion

1) changes the distribution of income between the wealthy, middle class, and poor 2) high debt can make taxes go up which means people can’t buy as much which hurts the economy 3) more taxes can reduce people’s incentive to work, invest and save

Gramm-Rudman-Hollings Balanced Budget Act of 1985 Effort to eliminate the deficit by 1991 It failed Budget Enforcement Act of 1990 It had a pay-as-you-go provision Means if there were new spending proposals or tax cuts, they must be offset by reductions elsewhere It no agreement was reached, then there would be automatic across-the-board spending cuts

Budget Reconciliation Act of 1993 Attempted to reduce the rate of growth of the deficit, but not the deficit itself Balanced Budget Agreement of 1997 Put “spending caps” on discretionary spending Many popular programs (health, science, etc.) had to be cut

In 1998, the US achieved a budget surplus Two reasons this happened: 1) strong economy led to record tax collections 2) there was a reduced rate of federal spending The debt still existed, but the deficit was gone However…..in several things happened: 1) recession 2) 9/11 and War on Terror 3) war in Iraq Balanced budget…….GONE!