The role of the federal government has grown, making it a vital player in the economy. Incomes are affected when the government decides where to make expenditures. Government spending directly affects how resources are allocated.
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.
Goods and Services- Planes, tanks, ships, space shuttles, office buildings, land for parks, capital goods for schools and libraries. Transfer Payments- A payment for which the government receives neither nor services in return. ex) Social Security, welfare, unemployment compensation, and Medicare.
Transfer payment from one level of government to another not involving compensation. ex) Interstate highways. Government pays for most of the cost to build the highway and the state it’s being built in covers the rest of the tab.
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 that may or may not coincide with the calendar year Mandatory spending: spending authorized by law that continues without the need for annual approvals of congress Discretionary spending: programs that must receive annual authorization (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. ◦ When the budget is complete, the budget is sent to the House of Representatives.
The House only deals with discretionary spending. Mandatory spending is not part of the annual budget process, although Congress can deal with its separately. ◦ Discretionary spending is broken down for action by various committees that propose appropriation bills. ◦ The budget is reassemble and voted on by the House and Senate.
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.