1. Federal Government Expenditures

2. Establishing the Federal Budget
An annual plan outlining proposed revenues and expenditures for the coming year
Consists of:
Mandatory Spending
Discretionary spending
Fiscal Year: 12 month financial plan
Starts October 1st ends September 30th

3. Establishing the Federal Budget
Federal budget consist of:
Mandatory Spending includes:
interest payments on borrowed money
Social Security
Medicare
Makes up 2/3 of the budget
Discretionary Spending includes:
Programs that Congress must approve
Makes up 1/3 of the budget

4. Establishing the Federal Budget: Step One
Executive Formulation
President establishes the general budge guidelines for a multiplayer year period
Primary focus is on the upcoming fiscal year
President confers with his advisors
Drafts a budget
Submits it to congress (request)
Must send budget to congress by the first Monday in February

5. Establishing the Federal Budget: Step One
George Bush’s federal budget
$1,922 billion of federal revenues
$2, 229 billion in mandatory and discretionary spending
The budget showed a Federal budget Deficit
An excess of expenditures over revenue
Federal Budget Surplus
Expenditures is less than revenues

6. Establishing the Federal Budget: Step Two
Congress can modify, approve, or disapprove the budget
House Action
debates discretionary spending
Sets budget targets
Assigns appropriations bills to sub committees (study and debate each bill)
Approved = House Appropriations Committee
Approved = entire House votes on Bill
Must be completed by September 15th

7. Establishing the Federal Budget: Step Three
Senate Action
May approved as sent by the House or Draft its own version
If differences exist = joint House-Senate committee to work out a compromise

8. Establishing the Federal Budget: Final Step
If bill is approved by both House and Senate
Sent to President for signature
May or may not be original budget proposal he sent
President can
Veto
Sign bill

9. Major Spending Categories
Mandatory Spending:
Social security
Income security
Medicare
Interest on the Federal Budget
Health programs
Veterans’ Benefit
Discretionary Spending
Education
Employment
Social services
Transportation
Administration of Justice
Natural resources
Environment

11. State and Local Government Expenditures

12. Approving Spending
Most States approve their budgets similar to federal government’s process
Some States have Balanced Budget Amendment
Constitutional amendment that requires that annual spending nor exceed revenues
Cut spending when revenues drop

13. Approving Spending Local Governments: power to approve spending
Mayor
City council
County judge
Elected representative or body
If unable to raise revenue then deal with inadequate resources

14. State Government Expenditures
80% of budget
Intergovernmental expenditures
Public welfare
Insurance trust funds
Higher education
Highways
Hospitals
Interest on public
20%
Corrections
Health
Natural resources
Utilities

15. Local Government Expenditures
L. Gov’ts include
Counties
Municipalities
Townships
School districts

16. Local Government Expenditures
2/3 budget
Elementary and secondary education
Public utilities
Hospitals
Police protection
Interest on debt
Public welfare
Highways
1/3 budget
Housing and community development
Fire protection
Parks and recreation

18. Deficits, Surpluses, and The National Debt

19. From the Deficit to the Debt
US History
Gov’t practiced Deficit Spending
1998 gov’t has first surplus in 29 years
Deficit spending: spending in excess of revenues collected
Planned deficit spending
Forced deficit spending

20. From the Deficit to the Debt
Historically:
Largest during WWII
budget surplus
Reagan cut taxes but increased defense spending
1993: Omnibus Budget Reconciliation Act deficit began to shrink

21. From the Deficit to the Debt
Treasury Department sells bonds to public to raise money
Federal Debt = total amount the government has borrowed from investors to finance its deficit spending
Total Federal Debt has grown $6.74 trillion by 2003
$1.9 trillion is trust fund money

22. From the Deficit to the Debt
Federal Debt
Owe most of federal debt ourselves
No repayment deadline
Repays debt , funds transfer to others who gain purchasing power (exception foreign investors)
Private debt
Owed to others
Repayment deadline
Individuals give up their purchasing power as pay down their debt

23. Impact of National Debt
Federal Debt impacts distribution of income
FD causes a transfer of purchasing power from private to public sector
Larger the FD = larger interest payment; more taxes a government MUST pay
Taxes needed to pay interest payments = reduction in the incentive to
Work, save, and invest

24. Answer: They tend to regard the portion of th edebt held in trust funds because the funds reprsent money government owes to itself. Economist focus instead on the public portion of the debt
The publicly held portion of the federal debt was $3.9trillion in The total federal debt in that year was about $2.8 trillion higher, so the total debt amounted to $6.7trillion. Why do economist regard the public portion of the federal debt as the economically relevant part of the debt?

25. Impact of National Debt
Selling bonds to raise money = Federal gov’t competing with private sector
Leads to higher interest rates
Crowding-out effect
The higher than normal interest rates that heavy government borrowing causes
If the government runs a deficit and tried to raise funds by selling bonds, it will cause the interest rate paid by private borrowers to go up.
Crowding out affects the allocation of resources in the economy. What happens to the interest rate when deficit spending increases?

26. Taming the Deficit
1991: Congress tried to mandate a balanced budget (Gramm-Rudman-Hollings [GRH])
Key : set federal deficit targets for the president and Congress
Failed for two reasons:
Congress discovered they could pass spending bills
Economy started to decline in July 1990

27. Taming the Deficit Budget Enforcement Act of 1990
Required Congress must “pay as it goes”
MUST offset new spending with cuts/reductions elsewhere
Omnibus Budget Reconciliation Act of 1993
Reduced the rate of growth of the deficit (not total)
Combined spending reductions with tax increases
Lead to a surplus in 1998
Congress gave the president line-item veto, Supreme Court declared it unconstitutional

28. Taming the Deficit The Balance Budget Agreement of 1997
Rigid spending caps (tried to balance the budget by 2002)
1999: Congress increase defense spending, cut taxes
Cut popular programs: health education, and veteran’s programs
2001: recession, War on Terrorism, continued growth of entitlements
Led to record budget deficits