Today’s Schedule – 11/20 PPT – Federal Spending – Fiscal Policy Filing Taxes HW – Read 15.1/15.2

Definitions Fiscal Policy- the use of government spending and revenue collected to influence the economy Federal Budget- a plan for the federal government’s revenues and spending for the upcoming year Fiscal Year- 12 month period – Federal Govt: Oct. 1 – Sept. 30

Spending Proposals Office of Management and Budget (OMB) – Government office that is responsible for managing the federal budget – Meets with each department /agency head to discuss how much $$ they want/need for upcoming year

Budget Approval OMB creates a proposed budget on behalf of the president Congress then reviews/debates the budget – Ease of passage depends on president’s relationship with Congress – Use the Congressional Budget Office (CBO) Budget must be adopted by May 15

Budget Approval One initial budget is approved, Congress must set spending limits by Sept. 15 – After which no new legislation can be passed to provide new/increased spending

Fiscal Policy Expansionary Policies- Fiscal policies that encourage economic growth – Tax cuts, higher spending Contractionary Policies- Fiscal policies that reduce economic growth – Higher taxes, less spending

Expansionary Policies Used to increase output Often used to stimulate the economy when in a recession

Expansionary Policies The government can: – Increase Spending High demand  High prices  Increased supply  Increased employment – Cut Taxes Attempt to encourage more spending Not spending money on taxes, have more money to buy G/S (see above)

Types of Spending Mandatory- Money lawmakers are required by law to spend on certain programs – Also to pay down national debt Discretionary- Money lawmakers can make choices

Mandatory- Entitlement Entitlement- social welfare programs that people are entitled to if meet specific requirements – Increasing cost as more people qualify – Once terms are set, cannot control number of people who qualify

Mandatory- Social Security Largest category of federal spending Used by 50million + Still going to be around when you retire? – 1995: 4 ppl paying taxes for 1 SS recipient – 2050: 2 ppl paying taxes for 1 SS recipient

Mandatory- Medicare Medical care for those 65+ – Also those with disabilities

Mandatory- Medicaid Medical benefits for low income families – States share costs with federal government – Largest source of assistance funding for low income families

Discretionary Spending- Defense Half of discretionary spending Salaries of armed forces members – As well as civilian employees Purchase of equipment and maintenance of bases

Discretionary Spending- Other Education Law enforcement Housing National Parks Environment Transportation Foreign aid

Federal Aid to State/Local Govt. $406 billion sent to state/local govts. Some program costs are shared – Medicaid, unemployment, hwy construction, education, low income housing, mass transit Any federal funding must be used exactly as specified

Contractionary Policies Govt. may want to slow down growth when demand is exceeding supply – High demand=increased price=inflation Decrease Govt. Spending Increase Taxes

Limitations of Fiscal Policy Difficult to change govt. spending – Much spending dictated by law (entitlements) Difficult to predict future of economy – Decisions often made based on past performance Results take time to show Political pressures for reelection Require team work w/ branches of govt.