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Section 1: The Economics of Government Spending Chapter Introduction Section 1: The Economics of Government Spending Section 2: Federal, State, and Local Government Expenditures Section 3: Deficits, Surpluses, and the National Debt Visual Summary Chapter Menu

All levels of government use tax revenue to provide essential goods and services. Chapter Intro 2

Section Preview In this section, you will learn that the role of the federal government has grown, making it a vital player in the economy. Section 1-Preview

Does government spending impact your everyday life? A. Yes B. No Section 1

The Economics of Government Spending Pork is a popular trend used by politicians to satisfy their constituents. Taxpayers generally would not approve of projects otherwise. Section 1

Government Spending in Perspective The government spends its revenues on goods, services, and transfer payments. Section 1

Government Spending in Perspective (cont.) Spending by the public sector has increased sharply since the Great Depression. Change in public opinion gave government a larger role in daily economic affairs. Massive government spending funded the U.S. involvement in World War II. Section 1

Government Spending in Perspective (cont.) Some question which goods and services government should provide versus what the private sector should provide. Section 1

Government Spending in Perspective (cont.) Government makes two kinds of broad expenditures: Purchase of goods and services Transfer payment Grant-in-aid Government Spending Section 1

Who would pay for the construction of a new public library? A. Grant-in-aid B. Private sector C. Transfer payment by U.S. Government D. Local taxpayers A B C D Section 1

Impact of Government Spending Government spending has a direct impact on our economy. Section 1

Impact of Government Spending (cont.) Government spending influences Resource allocation—if government withdraws subsidies to farmers, resources become available to other industries. Distribution of income Production in the private sector Tax burden increases Section 1

Section 1-End

Section Preview In this section, you will learn that governments provide money for many services and programs. Section 2-Preview

There is a lot of talk about a national health-care system There is a lot of talk about a national health-care system. Would you be in favor of this if your taxes had to increase drastically to pay for it? A. Yes B. No C. Possibly A B C Section 2

Federal, State, and Local Government Expenditures The federal budget contains a fair amount of ambiguity. Economy’s growth, slow down, or any unanticipated spending has an impact on the rough estimate of revenues and expenditures contained in the federal budget. Section 2

Federal Government Expenditures The federal government establishes a budget and allocates funds accordingly. Section 2

Federal Government Expenditures (cont.) The federal budget spans a fiscal year beginning each October 1st. Office of Management and Budget (OMB) prepares federal budget. Budget forwarded to House of Representatives—reviewed by specific house committees House subcommittees prepare appropriations bills. Section 2

Federal Government Expenditures (cont.) After hearings and debates, appropriations bills are voted on. Eventually forwarded to entire House for a vote Senate acts on bill after House has approved it. Senate may approve as is or draft own version. Section 2

Federal Government Expenditures (cont.) Joint House and Senate conference committee works out compromises. Compromised bill, approved by House and Senate, is forwarded to president for signature. If budget bill was altered too much, president can veto it and congress rewrites. If approved, budget becomes official for next fiscal year. Section 2

Federal Government Expenditures (cont.) Federal budget leads to a budget deficit or a budget surplus. The Federal Budget for Fiscal Year 2007 Section 2

Federal Government Expenditures (cont.) Federal budget expenditures include Social Security—considered mandatory spending National defense—considered discretionary spending Income security Medicare Section 2

Federal Government Expenditures (cont.) Federal budget expenditures include Health—Medicaid Net interest on debt Other expenditure categories Profiles in Economics: Alice Rivlin Section 2

State Government Expenditures At the state level, expenditures include public welfare and higher education. Section 2

State Government Expenditures (cont.) Unlike the federal government, some states have a balanced budget amendment. States must cut spending when revenues drop. Section 2

State Government Expenditures (cont.) State government expenditures include Intergovernmental expenditures Public welfare Insurance trust and retirement Higher education Other expenditures State and Local Expenditures Section 2

Local Expenditures Local governments spend money mainly on education, utilities, and public safety. Section 2

Local Expenditures (cont.) Local governments’ expenditures are Elementary and secondary education Utilities Public safety and health Other expenditures The Global Economy & YOU: International Education Spending Section 2

Section 2-End

Section Preview In this section, you will learn that deficit spending has helped create a national debt. Section 3-Preview

With the staggering number of individuals who want government services, is it really possible to have a balanced budget? A. Yes B. No A B Section 3

From Deficits to Debts Because of deficit spending, the national debt has increased dramatically. Section 3

From Deficits to Debts (cont.) Typically, deficit spending is a result of the government forced to spend more than it collects because of unexpected developments causing a drop in revenues or a rise in expenditures. The Federal Deficit and the National Debt Section 3

National Debt Since 12/1993 Year Total Est Debt, Ending President    Total  Est Debt, Ending President Current $ (1) Population (3) per Capita 12/31/1993 CLINTON $4,535,687,054,406 257,782,608 $17,595 12/31/1994 $4,800,149,946,143 260,327,021 $18,439 12/31/1995 $4,988,664,979,014 262,803,276 $18,983 12/31/1996 $5,323,171,750,783 265,228,572 $20,070 12/31/1997 $5,502,388,012,375 267,783,607 $20,548 12/31/1998 $5,614,217,021,195 270,248,003 $20,774 12/31/1999 $5,776,091,314,225 272,690,813 $21,182 12/31/2000 $5,662,216,013,697 282,171,957 $20,067 12/31/2001 BUSH $5,943,438,563,436 285,081,556 $20,848 12/31/2002 $6,405,707,456,847 287,803,914 $22,257 12/31/2003 $7,001,312,247,818 290,326,418 $24,115 12/31/2004 $7,596,165,867,424 293,045,739 $25,921 12/30/2005 $8,170,424,541,313 295,753,151 $27,626 12/28/2006 $8,680,224,380,086 298,593,212 $29,070 12/31/2007 $9,229,172,659,218 301,579,895 $30,603 12/31/2008 $10,699,804,864,612 304,374,846 $35,153 12/31/2009 OBAMA $12,311,349,677,512 307,006,550 $40,101 12/31/2010 $14,025,215,218,709 310,516,821 $45,167 12/31/2011 $15,125,898,976,397 312,788,655 $48,358

From Deficits to Debts (cont.) When the federal government runs a deficit, it must finance the revenue shortage by selling U.S. Treasury notes and other securities to the public. The national debt is equal to all outstanding federal notes, bonds, and other debt obligations. A balanced budget does not change the national debt. Section 3

From Deficits to Debts (cont.) A portion of the national debt is money the government owes itself as in trust funds. Two alternative views of the total national debt Debt as a percentage of GDP National debt computed on a per capita basis Section 3

From Deficits to Debts (cont.) Differences between public and private debt Country can never go bankrupt—most of debt is owed to itself. Repayment—new bonds are issued to pay off old bonds. Little purchasing power is given up. Section 3

Who is ultimately responsible for the growing deficit? A. Members of Congress B. President C. Taxpayers D. Future generations A B C D Section 3

Impact of the National Debt The national debt affects the distribution of income and transfers purchasing power from the private to the public sector. Section 3

Impact of the National Debt (cont.) The national debt, although mostly owed to ourselves, still affects the economy by Transferring purchasing power from private sector to public sector Reducing economic incentives Causing a crowding-out effect Redistributing income Two Views of the National Debt Section 3

The government’s borrowing of money can cause A. Interest rates to increase B. Interest rates to decrease C. Interest rates to remain the same A B C Section 3

Reducing Debts and the Debt Congress has tried a number of measures to reduce deficits and the national debt. Section 3

Reducing Debts and the Debt (cont.) Concern over deficit spending led to attempts to control it. Congress mandated a balanced budget. “Pay-as-you-go” provision Line-item veto and spending caps Raising revenues Reduced spending—difficult because of entitlements Section 3

Reducing Debts and the Debt (cont.) Action to reduce budget deficits and the national debt will depend on the willpower of Congress to make unpopular and difficult choices. The Size of the National Debt Section 3

What factors must change in order to get a grip on the national debt? A. Attitudes on entitlement must change. B. Politicians must stop favoring their pork projects and think of everyone’s welfare. C. Society must engage in a savings philosophy instead of a spending philosophy. D. Taxes must increase. A B C D Section 3

Section 3-End

Federal Budget Process Each year, the president sends a federal budget to Congress. The budget undergoes a lengthy approval process until it is signed into law. VS 1

Major Budget Categories The major budget categories vary for federal, state, and local governments. The focus of the federal government is on nationwide programs and expenditures. States pass on much of their budget to local governments and spend the rest on state-level programs. Local governments focus their expenditures on local needs. VS 2

Surpluses, Deficits, and Debt When revenues exceed expenditures, governments enjoy a budget surplus. If revenues are less than expenditures, governments are faced with a budget deficit. They then have to borrow money to meet expenditures and incur debt. VS 3

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Alice Rivlin (1931– ) founding director of the Congressional Budget Office director of the White House Office of Management and Budget vice chair of the Federal Reserve Board Profile

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pork a line-item budget expenditure that circumvents normal budget procedures and benefits a small number of people or businesses Vocab1

public sector that part of the economy made up of local, state, and federal governments Vocab2

private sector that part of the economy made up of private individuals and businesses Vocab3

transfer payment payment for which the government receives neither goods nor services in return Vocab4

grant-in-aid transfer payment from one level of government to another that does not involve compensation Vocab5

subsidy government payment to encourage or protect a certain economic activity Vocab6

distribution of income way in which the nation’s income is divided among families, individuals, or other designated groups Vocab7

constituents persons who are represented by an elected official Vocab8

reluctant hesitant or unwilling Vocab9

federal budget annual plan outlining proposed expenditures and anticipated revenues Vocab10

fiscal year 12-month financial planning period that may not coincide with the calendar year Vocab11

appropriations bill legislation authorizing spending for certain purposes Vocab12

budget deficit a negative balance after expenditures are subtracted from revenues Vocab13

budget surplus a positive balance after expenditures are subtracted from revenues Vocab14

mandatory spending federal spending authorized by law that continues without the need for annual approvals by Congress Vocab15

discretionary spending spending for federal programs that must receive annual authorization Vocab16

Medicare federal health-care program for senior citizens, regardless of income Vocab17

Medicaid joint federal-state medical insurance program for low-income people Vocab18

balanced budget amendment constitutional amendment requiring government to spend no more than it collects in taxes and other revenues, excluding borrowing Vocab19

intergovernmental expenditures funds that one level of government transfers to another level for spending Vocab20

ambiguity uncertainty about meaning or value Vocab21

coincide to happen or exist at the same time or in the same position Vocab22

deficit spending annual government spending in excess of taxes and other revenues Vocab23

national debt total amount borrowed from investors to finance the government’s deficit spending Vocab24

balanced budget annual budget in which expenditures equal revenues Vocab25

trust fund special account used to hold revenues designated for a specific expenditure such as Social Security, Medicare, or highways Vocab26

per capita per person basis; total divided by population Vocab27

crowding-out effect higher than normal interest rates and diminished access to financial capital faced by private borrowers when they compete with government borrowing in financial markets Vocab28

“pay-as-you-go” provision requirement that new spending proposals or tax cuts must be offset by reductions elsewhere Vocab29

line-item veto power to cancel specific budget items without rejecting the entire budget Vocab30

spending cap limits on annual discretionary spending Vocab31

entitlement program or benefit using established eligibility requirements to provide health, nutritional, or income supplements to individuals Vocab32

mandate to order or require Vocab33

instituted put into action Vocab34

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