The Federal Budget Rixie

Budget - what is it? Policy document allocating burdens (taxes) and benefits (expenditures) REVENUES: Where the government gets the money EXPENDITURES: What gov’t spends it on

Deficit When expenditures exceed revenues in a given fiscal year. (the opposite of a surplus) Federal Fiscal Year: October 1st through September 30th National Debt: the sum of our deficits over the years

Sources of Federal Revenue Individual income tax, social insurance taxes (SS & Medicare – also known as payroll taxes), corporate income tax, tariffs and excise taxes, other sources (such as estate taxes) What the government doesn’t collect in taxes, it borrows Treasury Dept. sells government bonds with guaranteed interest Citizens, corporations, foreign governments buy them

Income Tax What is it? 16th Amendment Progressive vs. Flat The federal government takes it out of your paycheck. 16th Amendment Gave the federal gov’t power to collect this Progressive vs. Flat Progressive: tax wealthier people higher rates Flat: tax everybody the same rate

Social Security Taxes (a payroll tax) Who pays them? Working citizens & their employers! This revenue goes into the Social Security Trust Fund. Who benefits? The elderly, disabled, & unemployed

Tax Policies – What do you think? Should we reduce taxes? Increase them? Can we reform tax law? (politically risky!)

Federal Expenditures 2 Main Ideas: What the government spends money on changes over time. Regardless, expenditures rise continuously.

National Security State Permanent military establishment Expensive military technology

Social Service State Social Security Act of 1935 Medicare – 1965 “Intergenerational Contract” Medicare – 1965 Is it sustainable?

Incrementalism Best predictor of this year’s budget = Last year’s budget, plus a little more Usually true, but not for every agency NASA, for instance

“Uncontrollable” Expenditures (a.k.a. mandatory spending) Interest on national debt MUST be paid! Entitlements – a certain # of people qualify for a certain # of benefits In other words, formulas written into law for these programs must be followed (so the spending is mandatory)

Military Defense Physical Resources Other Functions Discretionary Spending (includes all categories other than interest on the debt and mandatory spending) Military Defense Physical Resources Energy, Natural Resources & Environment, Commerce & Housing Credit, Transportation, Community & Regional Development Other Functions International Affairs; Science, Space, and Technology; Agriculture; Administration of Justice; General Government.

Politics of the Budget Process The “players” Interest groups Bureaucratic agencies Office of Management & Budget (OMB) POTUS Congressional Budget Office (CBO) Congressional committees Government Accountability Office (GAO)

The President’s Budget POTUS appoints director of OMB (approved by Senate) OMB prepares the budget; advises Prez First Monday in February Deadline to submit budget to Congress for the next fiscal year

Congress’s Role Power of the PURSE!!! Congressional Budget Office (CBO) advises Congress on the probable consequences of its budget decisions (counterweight to OMB)

Must first pass a budget resolution: Congress’s Role Must first pass a budget resolution: Bottom line of federal spending on all programs

2 major steps in funding the gov’t Authorization bill: Congress’s Role 2 major steps in funding the gov’t Authorization bill: Establishes or continues gov’t programs Appropriations bill: Funds the programs

budget decisions can lead to: Continuing resolutions Congress’s Role Gridlock on budget decisions can lead to: Continuing resolutions Continues an agency’s spending at last year’s level Sequesters Across the board spending cuts