Government Spending, Pt. 2

What are the three top expenditures of the federal gov’t? Social Security (#2) Medicare (#3) National Defense (#1)

State and Local Expenditures Intergovernmental expenditures (Funds sent to another level of gov’t) Public education Public welfare

Deficits, Surpluses, and the National Debt Deficit spending = spending > revenue Sometimes this is planned and intentional The difference is made up by borrowing Deficits add to debt

Surpluses A surplus = Revenue > spending Last president to run a surplus : Clinton A surplus helps reduce the debt

The Federal Debt What is it ? The total amount borrowed by investors to finance our deficit spending It grows from deficits It shrinks with surpluses It remains unchanged if we BALANCE THE BUDGET

How big is the debt today? As of 12:37 p.m. on 3/23/12, the national debt was $15,571,367,306,891. Just round that to the nearest TRILLION.

Impact of the Debt Higher taxes Purchasing power moves from private sector to public sector Higher taxes reduce incentive to work The “crowding out effect” higher than normal interest rates caused by heavy government borrowing

FISCAL POLICY Definition : the deliberate taxing and spending policies of Congress and the President intended to manage the business cycle. ****The two tools of fiscal policy are TAXING AND SPENDING*****

Using fiscal policy to manage the business cycle During a recession, the problem is lack of money. Fiscal policy : Cut taxes Increase gov’t spending Run a deficit

continued During expansion the problem is inflation; there is too much money. Fiscal policy : Raise taxes Cut gov’t spending Run a surplus