Fiscal Policy By: Brandon Harrington Andrew Milcovich Tillman Pugh Justin Zoetewey

The Federal Budget The Federal Budget—a plan for the federal government’s revenues and spending for the coming year A fiscal year—a twelve month period; for U.S. government it is from October 1 to September 30 Take 18 months to prepare Office of Management and Budget (OMB)—government office that manages the federal budget Reviews federal agencies’ proposals to receive certain amount of funds They give President a document that combines all individual agency budgets into a single budget Congressional Budget Office (CBO)—government agency that provides economic data to Congress  Created in 1974  Allows Congress to intelligently consider, debate, and modify the President’s budget proposal The first initial budget resolution is passed on May 15 The second budget resolution that sets binding spending limits is due September 15 The Appropriations Committee for each house sends bills, appropriations bills, to authorize specific spending before the end of the fiscal year If no agreement is reached by year-end, then the government goes into “stop-gap funding” where emergency funding to keep government running If no agreement between Congress and President can be reached the government “shuts down” and all but the necessary federal offices will close.

Fiscal Policy and the Economy Expansionary Policies—fiscal policies like higher spending and tax cuts that encourage economic growth Contractionary Policies—fiscal policies, like lower spending and high taxes, that reduce economic growth

Economic Schools of Thought Classical Economics—the idea that free markets can regulate themselves. Demand-side Economics—the idea that government spending and tax cuts help an economy by raising demand Keynesian Economics—a form of demand- side economics that encourages government action to increase or decrease demand output

Supply-Side Economics Supply-side Economics—a school of economics that believes tax cuts can help an economy by raising supply. The Laffer curve shows the relation between the tax rate set by the government and the total tax revenue collected by the government. Runs on the theory that a tax cut increases total employment so much that the government collects more in taxes at the new, lower tax rate. Laffer Curve

Fiscal Policies in American History During the 20’s US ran on the school of classical economics During WW2 the US economy worked on Keynesian Economic Theory Kennedy Administration started the first tax cut Reaganomics ushered in the era of supply-side economics Reagan cut taxes by 25 percent in over three years

Balancing the Budget Balanced budget—a budget in which revenue is equal to spending Federal budget is either in surplus or deficit Budget deficit—a situation in which the government takes more than it spends Budget surplus—a situation in which the government spends more than it makes If a government is in a deficit then there are two solutions: creating money or borrowing money  Creating money could lead to causing hyperinflation—very high inflation  The government usually borrows money by selling bonds Treasury bill—a bond that is repaid within three months to a year Treasury note—a bond that is repaid within two to ten years Treasury bond—a bond that can be issued for as long as 30 years  Borrowing allows the federal government to undertake projects that they might not otherwise afford

The National Debt National Debt—all the money that the federal government owes to bondholders The difference between debt and deficit is that deficit is the amount that the government borrows in one fiscal year budget whereas the debt is the sum of all deficits and surpluses The national debt as a percentage of GDP usually rises during periods of war At the end of the century the debt exceeded 5 trillion dollars The Outstanding Public Debt as of 04 Dec 2006 at 05:13:55 AM is: $8,640,648,112, The estimated population of the United States is 300,380,639 so each citizen's share of this debt is $28, The National Debt has continued to increase an average of $2.04 billion per day since September 29, 2006!

Deficit and Debt Reduction Most solutions to deficit and debt reduction come in the form of legislation Gramm-Rudman laws passed in the 80’s created automatic across the board budget cuts in federal expenditures if government spending passed a certain level Many times Congress has tried to amend the constitution to require a balanced budget

What’s in Store With all the baby-boomers retire around 2010? What will happen to Social Security with fewer people working? How will the government the ever increasing debt?