Presentation on theme: "Chapter 16- The Federal Budget"— Presentation transcript:
1 Chapter 16- The Federal Budget (1). Examine the Federal Budget, deficit spending, and the national debt.(2). Discuss the historic impact of deficits & budget surplus on the national debt.(3). Outline how the government obtains revenue from an historical perspective.(4). Contrast various Federal taxes levied, including: progressive & regressive taxes.(5). Examine how government spends its revenue and the changing nature of spending.(6). Discuss the growth of entitlement programs and various attempts to limit them.(7). Explain why "pork barrel" spending persists regardless of the vocal criticism.(8). Explain why Budget Deficits persist, and discuss the role of Congress, the President, and the Public in contributing to this problem.(9). Examine how our Budgetary Process has evolved and discuss key reform efforts.(10). Explain how the Federal Budget Cycle works and the significance of appropriations.(11). Discuss the brief period of budget surpluses and reason for the return of deficits.(12). Evaluate the Budget Process and explain the dominant role of politics affecting it.
2 Policymaking system => the Big Picture Politicians, campaign promises, and political reality:Talk is cheap=> Money appropriated sets Gov. policy prioritiesi.e. Government priorities determined by what is actually fundedPolicy: Expenditures,Taxes, Laws, Regs,non-decisionsAnd the method used to set fiscal policy priorities?
3 The Federal Budget Two Key Terms: Contrast Deficit versus Debt (how related?)Budget DeficitsThe amount by whichgovernment spendingexceeds governmentrevenues in a single year.National DebtThe total amount ofmoney the federalgovernment owes to pay for accumulateddeficits.
4 Budgets, Deficit Spending, & National Debt The Growing Federal Budget (Outlays):George Washington’s Budget=> $3-5M per yearPost Civil War costs=> $1B+ then down againWWI=> back up to $1B1962=> $100B1997=> $1 Trillion2001=> $1.8 Trillion2003=> $2.212 Trillion2004=> $2.272 Trillion (20.2% of GDP/GDP= Trillion)2005=> $2.338 Trillion (19.8% GDP – OMB estimate 4/2005)=> 19.8% of GDP (OMB estimate 4/2005)
5 The Rise and Fall of Deficit Spending 19th Century=> Balanced Budget (w/few exceptions)Budget Deficits => Key contributing events:1930s => FDR’s New Deal programs1940s => WWII1960s => LBJ’s War on Poverty & Vietnam War1980s => Reagan Tax cuts & rise of Defense spending1990s => Clinton Tax increase & Economic growth(Brief period of budget surplus- late 1990s)2003 => Bush Tax cut, Econ downturn, 9/11, Iraq War, Katrina & other natural disasters, oil shock, etc(Return to budget deficits for indefinite future)
6 The Ideal Budget Budget Surplus Balanced Budget A federal budget in which revenues exceed spending.Balanced BudgetA federal budget inwhich spending andrevenues are equal.OR
7 Budget Deficits & Surplus Over Time 20042005projected$427B4
10 Consequences of a Large National Debt Is debt always bad? (investment vs. consumption)Tuition for College versus Spring Break VacationWhen Government barrows $$$ => from whom?Interest payments => US & Foreign investors, Fed. PensionsThe trade offs:Lost opportunities (discretionary spending)Impact on interest rates?Impact on private sector growth? ($$ too expensive)Impact on jobs? => consumer spending?Impact on economic growth=>Impact on the National Economy (GDP)?
11 Government Revenue Where Does Government Revenue Come From? Government Revenue in Historical Perspective:Changes over time => Figure 16-3 & slideSocial Security Act of 1935 (FICA)FICA contributions increased over time=>(greater deduction from your paychecks)Result: FICA contributed more & more to Federal revenuesExamine change in Government revenue sources
15 Government Revenue Sources- 2005 What tax source has increased the most in a relatively short time?
16 Income versus Payroll Taxes Contrast the different types of taxes:Progressive tax (what is it & why is it progressive?)Regressive tax (what is it & make makes it regressive?)Progressive TaxA tax system in which those with high incomes pay a higher percentage of their income in taxes than those with low incomes.Regressive TaxA tax system in which those with high incomes pay a lower percentage of their income in taxes than those with low incomes.How does US Tax burden compare with other Industrial Nations?
18 Where Does Government Spending Go? The Changing Nature of Government Spending:Changes over timeShift from Cold War Defense spending to Human ResourcesFederal Spending by Type
19 Changing Federal Spending 1940-2005 What has triggered this increase in Federal spending on individuals?
20 The Growth of Entitlement Programs Entitlement programs – who qualifies?Social Security =>Pay as you go system => Federal Pyramid scheme? (trend & impact?)1950: (15 to 1)=> 1990: (5 to 1)=> Post Baby Boom retirement: (3:1)COLA & the CPI (Box 16-1 & slide)=> impact?Proposed adjustments? (increase taxes, cut benefits, up eligibility?)Making hard choices=> The 3rd Rail & who votes?Other Entitlement ProgramsMedicare (40M elders)=> $221Billion & growingMedicaid (35M poor) & Food Stamps (17M poor)Federal retirement & VA disability benefitsEntitlement programs are “non-discretionary” (?)*
21 Congressional Spending Two major categories of Federal Spending:Non-discretionary SpendingFederal spending on programs such as Social Security that cannot be controlled through the regular budget process. (For 2005: $1.481 Trillion)Discretionary SpendingFederal spending on programs that can be controlled through the regular budget process.(For 2005: $857 Billion of a $2.338 Trillion Budget)Contrast the two spending categories within the Federal Budget
22 Entitlement Expenditures Discretionary vs. Non-discretionary _______________________$1.481 Trillion$857 Billion*7%*How has Discretionary spending decreased over time?
23 Decreasing Discretionary Spending How can we increase Discretionary spending?
24 Limiting Entitlement Programs Areas requiring special attention:Long term budget problems (the Baby Boomers)Social Security concerns & escalating Health Care costsDifficulty restraining growth of entitlement programsNeed for more revenue (Taxes vs. Economic growth)Cutting costs: Political will vs. political costsControlling Pork barrel politicsEasier said than done=> conflicting objectives:Incumbent objective: improve reelection chances:One man’s pork is another’s vital programVehicle for “pork” => bill riders(Senator Stevens & Alaska’s “Bridge to Nowhere”)*
25 Problems in the Budget Process Legislation that appropriates Federal money for local projects of questionable value that may ingratiate a legislator with his or her constituents.Pork BarrelSpendingGovernment subsidies or tax breaks of questionable value to private corporations.Corporate Welfare
26 Who is Responsible for Budget Deficits? Congress and the PresidentRole in perpetuating budget deficits=>Decisions on programs, spending levels, & taxesCongressional appropriations & Presidential vetoPork Barrel politics & Budget riders**Usually attached to last minute Omnibus “must pass” BillsThe American PublicCongress responds to the wishes of the votersBalancing the budget vs. preserving key programsTop tax breaks favored by public (Figure 16-8)*
27 Top Tax Breaks for 2005$400+ Billion in lostannual revenue
28 The Budgetary Process - Historic overview Budgetary Process from George Washington to Nixon:Key Change: Budget & Accounting Act of 1921 =>Power of President’s control over Executive Branch enhancedThe President submits consolidated Budget to Congress from then on…Office of Management & Budget (OMB) – Nixon reforms in 1970Little change in Budget process until 1974:(The President proposes and Congress disposes):The President submits a budget to CongressCongress must then approve the budgetLets examine in more detail
29 Budgetary Reform in the 1970s Nixon’s impoundments & growing deficitsCongressional Budget & Impoundment Act of 1974Congressional Budget Office (CBO) vs. OMBDivided governmentConflicting budget priorities (President vs. Congress)Result: Continuing resolutionsBottom Line:Changing the rules fails to overcome basic disagreementThe Budget Cycle (Figure 16-9 & slide)*
31 The 2 Year Budget Process (Theory) FY 2005 BudgetFY 2006 BudgetFY 2007 BudgetRole of Continuing Resolutions (Reality)
32 Budgetary Reform in the 1980s Gramm-Rudman Reform attempts at fiscal disciplineGoal: Reduce deficits (result?)Disagreement of budget priorities trump reformsKey influence: Divided GovernmentLack of consensus & political willPresident Reagan (GOP)=> Tax cuts & strong DefenseCongress (Democrats)=> preserve domestic programsResult: increased defense spending & tax cuts=>Not offset by cuts in domestic programs=>Historic level deficits ensued
33 Deficits to Surpluses & Back Again Serious attempt to reduce deficit spending (Table 16-1)Budget Enforcement Act (BEA) of 1990Set limits on spending growth & imposed sanctionsThree separate categories “walled off” from changesDefense, domestic policy, & international affairsIncreases must be offset by program cuts within own “walls”(No robbing Defense to pay for domestic program increases)Clinton Budget for 1993(some program cuts & higher taxes)Deficits begin to gradually fall
34 Budget Deal of 1997 Let’s make a deal: (Clinton & the GOP Congress) Aim: balance budget by 2002 & Contract w/AmericaReality: Presidents have a vote too (veto)Forced compromise=> major cuts in Federal programsSurplus first appears in 1998 (1st since 1969)Combined effects of all of above? (Table 16-1)Is the author right about the cause of surpluses?
35 Surpluses Until the Bubble Burst Deficit spending has returned – why?Combination of several factors:2000=> Tech Bubble burst => $$$ recessionStock Market freefalls (NASDQ down 60%)Corporations cut spending & Job losses grow9/11/2001 => another major shock to economy(people sell more stocks, stop flying=> airlines fail)Cost of Katrina & other natural disastorsRecent Oil shockImpact of War on Terrorism & War in Iraq?*
36 Impact of War on Terrorism War on Terror (Afghanistan & elsewhere) =>Significant increase in defense $pendingBush Budget (initially: where to spend surplus)Tax cut (now substantially reduced by Congress)Increased spending on Defense & Homeland DefenseWar with (now in) Iraq=> cost estimates(In the Hundred(s) of Billions range)Cost of peace to be determined!Uncertainty of final outcome => credible exit strategyKey factor: patience & political will of American peopleImpact on Wall Street & link to economic growth??
37 More Budget Reforms? (Non-Starters) Line-Item Veto (OBE) => unconstitutionalCourt ruling: act violated separation of powersBalanced Budget Amendment (unlikely to pass)Impractical & too hard to implement in near termOMB projects deficits into 2008 & beyondFlat tax (pros & cons?) => also OBE – why?Loss of momentum & Bush’s Budget tax cuts =>Never had President’s supportRecent 2005 Tax Reform Proposals(Lack of Congressional & Presidential support)Any tax reform must by revenue neutral
38 Is the Budget Process Irrational? Role of past Budgets=> tinkering at the marginsIncremental Budgeting=> autopilot budgetingZero based budgeting=> too hard & disruptiveMechanical systems of reform as a substitute?Budget cycle (“The POM) => No fiscal disciplinePolitical Realities (The dirty little secret):Political priorities determine budget fiscal prioritiesPoliticians respond to conflicting Public demandsWhatever is most likely to get them reelected
39 Next Assignment Review of Test II results Chapter 17a: Domestic Policy Learning Objectives 1-5
40 Chapter 16 KEY TERMSBalanced budget: A budget in which spending and revenues are equal.Budget and Accounting Act of 1921: An act of Congress that created the Bureau of the Budget and allowed the president to review and coordinate the spending proposals of federal agencies and departments.Budget deficit: The amount by which government spending exceeds government revenues in a single year.Budget surplus: The amount by which government revenues exceed government spending in a single year.Congressional Budget and Impoundment Control Act of 1974: An act of Congress that created the new budget process and the Congressional Budget Office and curtailed the president’s power to impound funds.Congressional Budget Office (CBO): A nonpartisan congressional agency in charge of assisting Congress in reviewing and coordinating budget requests to Congress.Continuing resolutions: Temporary laws Congress passes to keep the government running when Congress misses the deadline for passing the budget.Corporate welfare: Government subsidies or tax breaks of questionable value to private corporations.Cost-of-living adjustment (COLA): An increase in Social Security or other benefits designed to keep pace with inflation.Discretionary spending: Federal spending on programs that can be controlled through the regular budget process.Entitlement programs: Programs, created by legislation, that require the government to pay a benefit directly to any individual who meets the eligibility requirements the law establishes.
41 Chapter 16 KEY TERMS (2)Flat tax: Any income tax system in which taxable income is taxed at the same percentage rate, regardless of the taxpayer’s income.Line-item veto: The ability of the executive to delete or veto some provisions of a bill to become law.National debt: The total amount of money the federal government owes to pay for accumulated deficits.Non-discretionary spending: Federal spending on programs such as Social Security that cannot be controlled through the regular budget process.Office of Management and Budget (OMB): The agency in charge of assisting the president in reviewing and coordinating budget requests to Congress from federal agencies and departments. Formerly the Bureau of the Budget.Pork barrel: Legislation that appropriates government money for local projects of questionable value that may ingratiate a legislator with his or her constituents.Progressive tax: A tax system in which those with high incomes pay a higher percentage of their income in taxes than those with low incomes.Regressive tax: A tax system in which those with high incomes pay a lower percentage of their income in taxes than those with low incomes.Revenue neutral: The quality of any tax reform plan that will neither increase nor decrease government revenues.Social Security Act of 1935: The act of Congress that created the Social Security tax (Federal Insurance Contribution Act—FICA) and Social Security programs.