CH 10, Section 3: Balanced budget amendment a proposed Constitutional amendment that requires that annual spending not exceed revenues Some states already have such amendments in place.

Intergovernmental expenditures funds that one level of government transfers to another for spending Largest category of state spending Distributed to counties, cities, towns Sales Tax Revenue

Section 4: Deficit spending government spending in excess of revenues collected. What are some of the reasons we take on deficit spending? War Financial Crisis

Federal debt all the outstanding federal bonds, borrowed moneys, payments to investors Used to finance government deficit spending To make up the shortage of revenue the government sells bonds and other forms of debt to the public.

Balanced budget annual budget in which expenditures equal revenues.

Trust funds special accounts used to fund specific types of expenditures. Social Security Insurance (SSI) Medicare Principle funds are increased using payroll tax Invested in various schemes and earn interest Distributed, mostly from the interest, Not supposed to touch the principle funds

Public vs. Private Debt Most of the Federal debt is owed to ourselves. Bond holders The American Public Private debt is owed to another. Banks Private debt is usually planned to be repaid 30 year mortgage Federal Government give little thought of repayment because they can issue more bonds.

Jon Stewart National Debt Why would our country be auctioned off to a couple from Beijing? Why would the Republican’s put out their own budget plan? (2012) Why did the White House invite Paul Ryan to the press conference? What program would see cuts to increase the healthcare of seniors? Our tax rate is at its lowest rate since when? Why would Obama say “More spending reductions in the tax code?”

Crowding-out effect Excessive government borrowing pushes up all interest rates, even private. Above normal market interest rates. Banks will have to pay out more interest when issuing their bonds.

Pay-as-you-go provision a requirement that new spending proposals or tax cuts must be offset by reductions elsewhere in the budget. Budget Enforcement Act (BEA), 1990. Helps prevent deficit spending Weaknesses include: Only applies to discretionary spending Can be suspended in a low-performing economy if the president declares an emergency.

Line-item veto President could select parts of a bill and veto them, but still pass the rest of the bill. Supreme Court declared it unconstitutional.

Spending caps legal limits on annual discretionary spending Balanced Budget Agreement, 1997 Some item limits were unpopular: Education Health Science

Entitlements broad social programs Established eligibility requirements make payments mandatory….. Health Nutrition Income supplementation

Assessments: Checking for Understanding 1 What are some of the services that state and local government provide for in their budget? Education Hospitals Public welfare Interest on debts Highways

Assessment 3 Describe how state governments handle the spending approval process. There are many different methods, but in most states the process is loosely modeled after the federal government’s system.

Assessment 4 List seven major categories of state spending. Intergovernmental expenditures Public welfare Insurance trust Higher education Highways Hospitals Interest on debt

Assessment 5 Identify the seven major categories of local government spending. Elementary and secondary spending Public utilities Police protection Hospitals Interest on debt Public welfare Highways

Assessments: Checking for Understanding 1 What is the difference between the federal debt and the federal deficit? Federal deficit: The government’s expenditures exceed its revenues in a given year Federal deficit adds to the federal debt.

Assessment 3 Describe how the federal deficit affects the debt. When the federal government runs a deficit, it must borrow to cover the shortage of revenue, adding to the total federal debt.

Assessment 4 List five ways the national debt can affect the economy. May reduce purchasing power of economy affect the distribution of income, transfer purchasing power from private to public sector, reduce the incentive to work, save, and invest, cause a rise in interest rates.

Assessment 5 Identify four recent attempts to bring the federal deficit under control. Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings) Budget Enforcement Act, 1990 Omnibus Budget Reconciliation Act of 1993 Balanced Budget Agreement, 1997

Assessment 6 Identify three entitlement programs. Social Security Medicaid Medicare Agricultural price supports Federal employee retirement and health benefits Unemployment compensation Aid to the poor

Image, p. 269 What are the three largest spending categories for local governments? For state governments? Elementary and secondary education Utilities Police protection Intergovernmental expenditures Public welfare Higher education

Image, p. 270 Which level of government has the major responsibilities for higher education? State

Image, p. 273 What caused the deficit to return in 2002? Tax reductions and a recession in 2001

Image, p. 274 What happened to the size of the federal debt since 2001? It has increased + Why do you think it increased? (consider: GOP Congress had legislated a balanced budget requirement in the late 1990s and it should NOT have increased) Wars in Afghanistan and Iraq Tax cuts to the richest sector (individuals and corporations over $200,000/year income)

Image, p. 275 Why do economists regard the public portion of the federal debt as the economically relevant part of the debt? They tend to disregard the portion of the debt held in trust funds Because the funds represent money the government owes to itself Economists focus instead on the public portion of the debt.

Image, p. 276 How does the federal debt impact the economy May reduce purchasing power of economy Affect the distribution of income Transfer purchasing power from private to public sector Cut down incentive to work, save, and invest Cause rise in interest rates