 The Federal government  collects money (revenue) and  spends money.  The government is important in our economy.

The circle graph shows that all levels of government combined account for about 28%-nearly 1/3 of the nation’s total output. The bar graph shows that federal spending accounts for nearly 2/3 of all government spending, or 18% of the total output.

1. Goods and Services 2. Transfer Payments Planes, tanks, ships space shuttles office buildings land for parks capital goods for schools and libraries. Social Security welfare Unemployment compensation Medicare Grant in Aid: Payment from one level of government to another (ex. federal govt to state govt) Example: interstate highways: Fed govt pays most and state pays rest

 The government expenditures have grown since the 1940s ◦ WWII ◦ Change in public opinion that government should have a large role in everyday economic affairs. ◦ TVA, low cost electricity to people in the south in the 1930s

Fiscal year: 12-month financial planning period October 1-September 30 2 TYPES OF GOVERNMENT SPENDING 1. Mandatory Spending 2. Discretionary Spending Spending by law. Congress does not need to approve Spending that needs to be approved each year. Social Security entitlements Medicare Medicaid SSI Military Coast Guard Welfare

Federal Government Expenditures  The president is responsible for developing the federal budget for the fiscal year which begins on October 1 and ends Sept. 30. ◦ When the budget is complete, the budget is sent to the House of Representatives. October 1

 The House only deals with   is not part of the annual budget process, although Congress can deal with its separately. Discretionary Spending Various committees in the House decide how to spend the money and propose appropriation bills. House votes on bill. The budget is reassemble and voted on by the House and Senate. Mandatory Spending Military Coast Guard Welfare

 If differences between the House and the Senate emerge, a compromise bill is developed on which both vote.  The largest components of the federal are social security, national defense, income security, Medicare, net interest on the federal debt.

 State & Local Expenditures ◦ State and local levels of government also have expenditures like at the federal ◦ These governments must approve spending before revenue dollars can be released ◦ In most states it’s modeled after the federal government

 Approving spending ◦ Some states have enacted a Balanced budget Amendment, Which is a constitutional amendment that requires that annual spending not exceed revenue ◦ When revenue drops….NO MORE SPENDING ◦ A reduction in revenues may occur if sales tax or state income tax fall because of a decline in general level of economic activity

 State Government Expenditures ◦ Major types of SGE shown in the following picture ◦ 7 of the most important categories, accounting for nearly 80% of all state spending are going to be shown in the following picture ◦ The largest category of state spending….is….wait for it….InterGovemental Expenditures; which are funds that one level of government transfer to another for spending. ◦ Comes from anything that’s taxable ◦ The 2 nd largest is Public Welfare

 Local Government Expenditures ◦ These include; Counties, Municipalities, townships, school districts, and other special districts ◦ Largest amount of spending in local governments is elementary & secondary education, utilities, hospitals, police protections, interest on debt, public welfare, and highway ◦ Schools are priories.

 Historically the federal budget has been characterized by a remarkable amount of deficit spending-or spending in excess of revenues collected.  When the federal government runs a deficit, it must finance the shortage of revenue by borrowing from others.

 Federal budget deficits existed from 1970 until 1998 when the budget finally had a surplus.  Deficits add to the federal debt and the total debt amount to $5.7 trillion in fiscal year 2001, approximately $3.3 trillion of which is held by the public.  The debt affects the economy in several ways ◦ Taxes are needed to pay the interest on the debt ◦ The distribution of income is altered ◦ Purchasing power is transferred from the private sector to the public sector. ◦ Incentives to work, save, and invest may also be altered.

 Despite recent budget surpluses, the overall federal budget would show a deficit if not for the surpluses in the Social Security Trust Fund.  The rapid growth of entitlements are still threat to future budget surpluses.

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