The Federal Budget Budget is a policy document allocating burdens (taxes) and benefits (expenditures).Budget is a policy document allocating burdens (taxes) and benefits (expenditures). Government collects $$$ by taxes and spends it via expenditures.Government collects $$$ by taxes and spends it via expenditures. If tax allocations are higher…it’s a surplus (it did happen in ’99!)If tax allocations are higher…it’s a surplus (it did happen in ’99!) If expenses are higher...it’s a deficit which is then added to the national debt and you get a shortfall in the trillions …and it takes far too much of the current budget just to pay interest on the debt!If expenses are higher...it’s a deficit which is then added to the national debt and you get a shortfall in the trillions …and it takes far too much of the current budget just to pay interest on the debt!

GOVERNMENT’S SOURCES OF REVENUE THREE MAJOR SOURCES:THREE MAJOR SOURCES: 1.Personal & corporate income tax 2.Social insurance taxes 3.Borrowing (Bonds)

INCOME TAXES 16 TH AMENDMENT – 1913, explicitly permitted Congress to collect income tax16 TH AMENDMENT – 1913, explicitly permitted Congress to collect income tax A PROGRESSIVE TAX - meaning?A PROGRESSIVE TAX - meaning? Largest source of federal revenueLargest source of federal revenue Married Taxpayers Filing Jointly Individual Taxpayers

SOCIAL INSURANCE TAXES Paid by both Employers and EmployeesPaid by both Employers and Employees –For example: social security – each pays in 4.2% now –Social Security fastest growing source of government income Do NOT go into the general budget fund but, instead, are earmarked for social security payments – they are an uncontrollable expenditureDo NOT go into the general budget fund but, instead, are earmarked for social security payments – they are an uncontrollable expenditure Done through BONDS Treasury Dept. sells bonds, guaranteeing to pay interest to bondholder. Citizens, corporations, mutual funds, etc. purchase bonds Federal government has NEVER defaulted on its bonds. DEBT – all of the $ borrowed over the years & still outstanding… now at over $17 trillion

Regan’s Description of a Trillion Dollars: In a speech to Congress in February 1981: “A few weeks ago I called such a figure, a trillion dollars, incomprehensible, and I’ve been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high.”

FEDERAL EXPENDITURES Primary Federal Expenditures:Primary Federal Expenditures: –Social Service State (social security, Medicare, etc.) Medicare, etc.) –Interest on the national debt –National Defense Military used to be largest part of expenditures – permanent military & expensive technology in Cold War years; remains high in “war on terror” yearsMilitary used to be largest part of expenditures – permanent military & expensive technology in Cold War years; remains high in “war on terror” years BUT, biggest slice of budget goes to UNCONTROLLABLE EXPENDITURES –ENTITLEMENT programs – if you qualify, you get them, no matter what the cost to the governmentBUT, biggest slice of budget goes to UNCONTROLLABLE EXPENDITURES –ENTITLEMENT programs – if you qualify, you get them, no matter what the cost to the government –Social Security Act 1935 –Medicare 1965 – hospitals/doctors for elderly (prescriptions added 2003) –Medicaid also added in 60s -- aid to the poor/needy

The Budgetary Process POWER OF THE PURSE belongs to Congress!POWER OF THE PURSE belongs to Congress! Nixon established OFFICE OF MANAGEMENT AND BUDGET (OMB) -1970sNixon established OFFICE OF MANAGEMENT AND BUDGET (OMB) -1970s –P’s Budgetary Arm –Supervises preparation of the federal budget; advises the P The basic process:The basic process: 1.P sends the budget recommended by OMB to Congress in January 2. Then, 2-step process begins in Congress: Authorization – Congress authorizes/changes a program & sets a spending limit on it – what they might getAuthorization – Congress authorizes/changes a program & sets a spending limit on it – what they might get Appropriations – Congress sets final funding of the programs set by the authorization bill; can’t go higher, but can give lower amounts.Appropriations – Congress sets final funding of the programs set by the authorization bill; can’t go higher, but can give lower amounts. 3.Congress hammers it out for months; sends to P by Sept. for signature & to be ready for new fiscal year that starts Oct. 1