Federal Government Expenditures

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 1 st ends September 30 th 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

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 One

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 15 th Establishing the Federal Budget: Step Two

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: Step Three

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 Establishing the Federal Budget: Final Step

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

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 Approving Spending

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

Historically: –Largest during WWII – 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 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-Rudman- Hollings [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

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 Taming the Deficit