1. Splash Screen

2. 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

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

4. 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

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

6. 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

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

8. 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

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

10. 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

11. 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

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

13. 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

14. Section 1-End

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

16. 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

17. 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

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

19. 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

20. 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

21. 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

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

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

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

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

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

27. 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

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

29. 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

30. Section 2-End

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

32. 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

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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

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

44. 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

45. 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

46. 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

47. Section 3-End

48. 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

49. 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

50. 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

51. VS-End

52. Figure 1

53. Figure 2

54. Figure 3

55. Figure 4

56. Figure 5

57. Figure 6

58. Figure 7

59. 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

60. DFS Trans 1

61. DFS Trans 2

62. DFS Trans 3

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

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

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

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

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

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

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

70. constituents
persons who are represented by an elected official
Vocab8

71. reluctant
hesitant or unwilling
Vocab9

72. federal budget
annual plan outlining proposed expenditures and anticipated revenues
Vocab10

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

74. appropriations bill
legislation authorizing spending for certain purposes
Vocab12

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

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

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

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

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

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

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

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

83. ambiguity
uncertainty about meaning or value
Vocab21

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

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

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

87. balanced budget annual budget in which expenditures equal revenues
Vocab25

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

89. per capita
per person basis; total divided by population
Vocab27

90. 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

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

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

93. spending cap
limits on annual discretionary spending
Vocab31

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

95. mandate
to order or require
Vocab33

96. instituted
put into action
Vocab34

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