Chapter 14: Government Revenue and Spending Section 3: Federal Government Spending pgs. 428-433

Federal Expenditures The programs & services the federal government funds are divided into two categories. Mandatory spending—or spending that is required by current law Discretionary spending—or spending that the government must authorize each year.

Mandatory Spending This makes up well over half of all federal spending and most of it is in the form of entitlements which are social welfare programs. Social Security is a one of these programs. As we saw in the last section it aids older citizens who have retired, children who have lost a parent or both parents, and people with disabilities. Social Security takes the largest amount of federal spending.

More Mandatory Spending Programs The Medicare program was introduced in 1966, to provide people over 65 with medical coverage. Employers and employees each pay 1.45% of employee income. In 2006, means testing was added, so the most wealthy would not received Medicare. Medicaid was started at the same time as Medicare, to give medical coverage to poor people. 63% of Medicaid is paid for by the federal government and the rest is paid for by the state.

Other Mandatory Spending Programs The Food Stamp program provides funds for about 26 million low-income people. Veterans’ benefits include health care coverage & disability payments for injured vets. Vets also receive educational benefits. Vet benefits total $50 billion a year. Unemployment insurance is also part of mandatory spending. Border protection and enforcement of some immigration laws.

Discretionary Spending More than a third of federal revenue goes to discretionary spending, and it includes: Interstate highway system & transportation programs, like Amtrak Natural resources & the environment, including conservation programs, pollution clean-up, and national parks education, like college tuition assistance

More Discretionary Spending Science, space, technology, and other research programs Justice administration, including enforcement agencies, such as the FBI, and the federal court system. The largest discretionary expenditure is national defense and it takes up 50% of the discretionary budget.

The Federal Budget & Spending Each year the President and Congress work together to establish the federal budget, a plan for spending federal tax money. The budget is prepared for a fiscal year, a 12-month period for which an organization plans its expenditures. The federal government’s fiscal year runs from October 1st to September 30th. The President’s budget is prepared by the Office of Management and Budget (OMB) and takes into account estimated tax receipts and requests by all federal departments & agencies.

Congress Acts on the Budget The Congressional Budget Office helps the House and Senate develop guidelines for different appropriations, which are set amounts of money set aside for specific purposes. Members of Congress often make deals to gain votes for appropriations that they support. Congress votes on the final budget and sends it to the president for approval. If the budget is not approved by the beginning of the new fiscal year, the Congress passes resolutions to keep the government running on a day-to-day basis.

Methods of Federal Spending After budget approval, the funds are spent in several ways. One way is direct spending, by which the government buys goods and services that it needs. A 2nd way is through transfer payments—money distributed to individuals who do not provide goods or services in return. Example: Social Security The 3rd way is grant-in-aid transfer payment from the federal government to state of local government. Example: grants to states, local governments, or regions

The Impact of Federal Spending B/c the federal gov. sends trillions of dollars, it is a big factor in the economy. It influences the economy in three ways: Resource Allocation-the federal gov. decides where it is going to spend its money Income Redistribution-for example: transfer payments for health care, retirement, Food Stamp benefits, or how the gov. awards contracts Competition with the Private Sector- for example veterans’ hospitals, federal housing, even education