Government Spending Chapter 10

Government Spending in Perspective Government spends more then all privately owned businesses combined Per capita- means per person: government spends almost $10,300 for every man, woman and child in US

Government Spending in Perspective Public sector- the part of the economy made up of federal, state and local governments (did not begin to rise significantly till 1940) Reasons spending increased: WW2 required huge amounts of money Change in public opinion gave government a larger role (Great Depression- regulate banks etc) Success of large scale government works projects such as the TVA or Tennessee Valley Authority

Questions Who things government spending is a good thing? Who thinks the government spends to much? Who thinks not enough? Why does the government need to be involved in some aspects?

Government Spending in Perspective Private sector- the part of the economy made up of private individuals and privately owned businesses Debate on what government should cover and what the private sector should provide People unsure how much is to much

Questions Did the current administration take control of to much in the private sector? Should they have or should we have let the banks and auto industry collapse? When do you draw the like on government involvement?

Two Kinds of Spending First is goods and services Government buys goods such as tanks, planes, ships, office buildings, land and capital goods The government also hires people to work agencies and staff military More the government provides, the more goods and services it consumes

Two Kinds of Spending Second kind is transfer payment- which is a payment for which the government receives neither goods nor services in return Examples are Social Security, welfare, unemployment and aid for people with disabilities Grant-in-aid: example would be Interstate highway construction…the federal government grants money to cover the majority of the cost

Impact of Government Spending Government spending decisions directly affect how resources are allocated Spending in rural vs urban can shift where funding goes thus benefiting one over the other Supporting agriculture products keeps certain industries working

Impact on Government Spending Distribution of income- the ways in which income is allocated among families, individuals, or other designated groups in economy Buying fighter planes from one factory vs another as an impact on both factories Government can provide temporary income support such as buying pork in an attempt to support low pork prices

Who Agrees???

Impact on Government Spending Competition between the private sector and the public sector…example of this is higher education State Colleges vs Private Colleges Veteran hospitals vs public hospitals both offer similar services one funded by tax payers

Questions What is to much for the government bailout/spending? What should just be nationalized and what should be privatized? Who would like to follow a more European model? Who would not?

Federal Government Expenditure Section 2

Establishing the Federal Budget Federal budget- an annual plan outlining proposed revenues and expenditures for the coming year Mandatory spending- 2/3 of the federal budget it is spending authorized by law that continues without the need for annual approval of Congress Examples: Social Security and Medicare

Establishing the Federal Budget Discretionary spending- represents the remaining 1/3 of the budget it deals with programs that must receive annual authorization Examples: how much to spend on the military, Coast Guard and welfare

Question What do you think about the budget? What should be required spending and what should not? What would you change?

Establishing the Federal Budget Fiscal year- a 12 month financial planning period that may or may not coincide with the calendar year Starts on October 1 of every year and expires on September 30 of the follow year

Establishing the Federal Budget Executive formulation is the first step in developing a budget. This means that the president establishes the general budget guidelines for a multiyear period. Talks to other agencies such as the Office for Management and Business Must be sent to Congress by first Monday in February

Deficit vs Surplus Federal deficit- an excess on expenditures over revenues Federal surplus- when expenditures are less then revenues Depends largely on economy and cooperation of Congress

Questions Is a surplus always possible? When is a deficit necessary? When does spending become absolute regardless of the cost it has?

Action by the House Presidents budget proposal is only a request Congress has power to approve, modify or disapprove House sets initial budget targets for discretionary spending Once agreed on they various parts get assigned to subcommittees it breaks budget down to 13 smaller ones

Action by the House Appropriation bill is an act of Congress that allows the federal agencies to spend money for specific purposes House sub-committees hold hearing on each bill, if approved it is sent to full House Appropriations Committee if it pass there sent to entire House for approval September 15th deadline however due to interests of members in the House it can be delayed

Action by Senate After the House approves it, it goes to the Senate May approve House bill or make own, if differences exist sent to a joint House-Senate conference Seek advice from the Congressional Budget Office who evaluates impact and projects expenditure as well as revenues

Final Approval If all goes well the compromised bill is approved President can now veto the new budget if it is different from what original was Worst case the government can shutdown briefly like it did in late 1995 early 1996 Once signed by President is becomes official document for next fiscal year

Debt in Every Budget?

Major Spending Categories Payments to aged and disable Americans through Social Security largest amount Old-Age and Survivors Insurance (OASI) is apart of it Disability Insurance payments (DI) for those unable to work Defense/Weapons is largest discretionary category who is approved every year

Major Spending Categories Income security include expenditures for retirement benefits to railroad workers and disabled coal miners etc Subsidized housing, child nutrition and food programs for low-income families also fall under this category Most of these are mandatory and require no approval

Medicare Is a health program available to all senior citizens regardless of income Began in 1966 Provides an insurance plan that covers major hospital costs and offers additional optional insurance Does not require approval

Fair description?

More Debt When the government spends more then it collects it borrows money to make up the difference Interest on federal debt made up the sixth largest category in federal spending for 2004

Healthcare Healthcare services for low-income people, disease prevention and consumer safety account for part of the federal budget Medicaid is a joint federal-state medical insurance program for low-income persons Occupational Safety and Health Administration is a federal agency that monitors occupational safety and health in workplace

More Funding in Healthcare Research for AIDs and breast cancer as well as substance abuse treatment and mental health services all add to government spending Medicaid is mandatory while others are discretionary

Other Categories Education Training Employment Social services Transportation Veterans benefits Administration of justice Natural Resources Environment

Too Much Spending???

Questions What should be cut out of the budget? What should be added to the budget? How can we raise more money to help cover costs? When do you draw the line…legalizing prostitution? Marijuana? Drugs?

State and Local Government Expenditures Section 3

Approving Spending Balanced budget amendment- a constitutional amendment that requires the annual spending not exceed revenues Can not spend more then you make

Approving Spending Local level: mayor, city council, county judge or some other elected official decides Money collected from property tax and other local sources limits spending of local agencies If not able to raise money often can not hire the civil workers Ex: teachers, police, firefighters, county/city jobs

State Government Expenditures Seven categories account for 80% of spending Largest category is intergovernmental expenditures- funds that one level of government transfers to another level for spending Sales tax once example distributed to towns/cities

State Government Expenditures Second largest is public welfare Ex: Cash assistance, medical care, welfare and its various institutions Retirement funds take up a large part of as well Higher education and highway constructions/road improvement take up a significant amount

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Local Government Expenditures Include counties, municipalities, townships, school districts and other special districts Largest pending is education k-12, utilities, fire/police, interest on debt, public welfare and highways 1/3 of spending is on k-12 education

Local Government Expenditures Spends on all aspects of local government including roads, street repairs, street signs, snow removal, housing , park and community development

Deficits, Surpluses and The National Debt Section 4

From the Deficit to the Debt 1998 first federal surplus in 29 years http://usdebtclock.org/ Deficit spending- spending more then collected When government runs deficit it adds to debt We borrow from others to cover this Department of Treasury sell bonds and other forms of debt to public

Deficit to Debt Federal debt- the total amount the government owes to people Debt grows whenever the government spends more then it has/collects Balanced budget- an annual budget were spending and revenue are equal Trust funds- special accounts used to fund specific things such as Social Security

Impact of the National Debt Depending on where we get the money from it affects a economic class More debt=more taxes=less money for you Money spent carelessly can make you less motivated to work Crowding out effect- the higher then normal interests rates that heavy government borrowing causes

Taming the Deficit Gramm-Rudman-Hollings: set target deficit targets for Congress and presidents to meet over a six year period 85-91 It failed for two reasons: Congress discovered that they could get around it by passing spending bills after it expired, second economy declined in 1990 causing the law to become invalid

Taming the Deficit Budget Enforcement Act of 1990 “Pay as you go” provision- a requirement that new spending proposals or tax cuts must be offset by reductions elsewhere Only applies to discretionary spending Can be suspended during hard economic times

Taming the Deficit Omnibus Budget Reconciliation Act of 1993 Clinton’s goal to reduce debt over 6 years Spending reductions and tax increase especially on wealthiest 1.2 percent of tax payers

Taming the Deficit Balanced Budget Agreement of 1997 Line item veto- the power to cancel specific budget items with out rejecting the whole budget, however deemed unconstitutional Spending caps- legal limits on discretionary spending to assure balanced budget by 2002

Hope or Epic Fail? 1998 surplus due to record tax collections and a reduced rate of spending Recession 2001 reduced tax collection 9/11 sent the US into a economic spiral as the wars in Iraq and Afghanistan began Entitlements- broad social programs that use up part of the budget If people meet requirements they can take from it