Introduction Budget: –A policy document allocating burdens (taxes) and benefits (expenditures). Deficit: –An excess of federal expenditures over federal revenues. Expenditures: –What the government spends money on. Revenues: –Sources of money for the government.
Sources of Federal Revenue Income Tax –Shares of individual wages and corporate revenues. –The 16 th Amendment permitted Congress to levy an Income tax. –The individual part is the largest single revenue source for the government. –Income tax is progressive: Those with more income pay higher rates of tax on their income.
2014 Tax Table 10% on taxable income from $0 to $9,075, plus 15% on taxable income over $9,075 to $36,900, plus 25% on taxable income over $36,900 to $89,350, plus 28% on taxable income over $ 89,350 to $186,350, plus 33% on taxable income over $ 186,350 to $405,100, plus 35% on taxable income over $ 405,100 to $406,750, plus 39.6% on taxable income over $ 406,750.
Figure 14.1 Sources of Federal Revenue Social Insurance Taxes- –Employers/employees pay Social Security taxes; money is deducted from paychecks and matched by the employers; money is earmarked for Social Security Trust Fund
Sources of Federal Revenue Borrowing –The Treasury Department sells bonds - this is how the government “borrows” money. –The federal debt is the sum of all the borrowed money that is still outstanding. –The government competes with other lenders. –Government does not have a capital budget.
Sources of Federal Revenue Taxes and Public Policy –Tax Loopholes: Tax break or benefit for a few people - not much money is lost. –Tax Expenditures: Special exemptions, exclusions, or deductions - lots of money is lost.
Sources of Federal Revenue Taxes and Public Policy cont… –Tax Reduction: The general call to lower taxes. –Tax Reform: Rewriting the taxes to change the rates and who pays them.
Big Governments, Big Budgets –A big government requires lots of money. –As the size of government increases, so does its budget. The Rise and Decline of the National Security State –In the 50’s & 60’s, the DOD received more than half the federal budget. –Defense now constitutes about one-sixth of all federal expenditures.
Federal Expenditures: Mandatory Spending Expenditures funded by permanent appropriations –examples: congressional salaries, interest on the national debt Entitlements-people meeting relevant eligibility requirements are legally entitled to benefits; doesn’t change year to year but Congress CAN change the eligibility rules –Social Security –Medicare & Medicaid Makes up 2/3rd’s of the Total Federal Budget
The Rise of the Social Service State –The biggest part of federal spending is now for income security programs. –The biggest of these is Social Security. –Social Security has been expanded since 1935 to include disability benefits and Medicare. –These benefit programs face financial problems with more recipients living longer.
Federal Expenditures Trends in Social Service Spending (Figure 14.5)
Federal Expenditures: Discretionary Spending Portion of the budget that goes through the annual appropriations process; can increase/decrease from year to year –National Defense –other examples: education, housing assistance, health programs Subsidies –direct grants, loans, tax breaks, etc. provided by the government to aid consumers and/or producers i.e. farm subsidies, electricity subsidies to the poor during the winter
Federal Expenditures Incrementalism –The idea that last year’s budget is the best predictor of this year’s budget, plus some. –Agencies can safely assume they will get at least what they got last year. –Focus & debate on the increase over last year. –The budgets tend to go up a little each year.
Federal Expenditures “Uncontrollable” Expenditures –Spending determined by the number of recipients, not a fixed dollar figure. –Mainly entitlement programs where the government pays known benefits to an unknown number of recipients - Social Security. –The only way to control the expenditures is to change the rules.
The Budgetary Process Budgetary Politics –Stakes and Strategies All political actors have a stake in the budget. All actors try and tie their budget needs to national or political needs. –The Players Lots of players, with the president and Congress playing important roles. Almost all committees are involved in the budget. –Federal Government has not passed a real budget since 1997.
The Budgetary Process The President’s Budget –Presidents originally played a limited role in the budget. –Now budget requests are directed through the OMB and president before going to Congress. –The budget process is time consuming - starting nearly a year in advance. –The OMB, the president, and the agencies negotiate over the budget requests.
The Budgetary Process Step 1: President submits a budget request the administrations intended spending and revenue plans for the following fiscal year; includes funding requests for Independent agencies and Cabinet departments 1st Monday in February Step 2: Drafting of a Budget resolution House and Senate blueprint for the actual appropriations process; must be approved by both houses of Congress by early April The GAO, OMB, CBO, & Treasury Department important information in the budget making process Fiscal Year begins October 1st and ends September 30th
The Budgetary Process Congress and the Budget –Reforming the Process. Congressional Budget and Impoundment Control Act of 1974 an act designed to reform the congressional budgetary process It established the following: A fixed budget calendar A budget committee in each house The CBO, which advises Congress on the probable consequences of its decisions, forecast revenues, and is counterweight to OMB..
Economic Policy Making Unemployment rate-% of Americans seeking work who are unable to find it Inflation-the rise in prices for consumer goods Monetary policy- manipulation of the supply of $ in private hands –”The Fed” -Federal Reserve System-regulates the lending practices of Banks and thus the money supply –”The Fed” -Board of Governors are appointed by the President with the consent of the Senate Fiscal policy- the impact of the federal budget-taxes, spending, and borrowing- on the economy –Congress and the President control fiscal policy
The Budgetary Process Congress and the Budget –The Success of the 1974 Reforms. Between 1974 and 1998, every budget was a deficit budget. Congress misses most of its own deadlines. Congress passes continuing resolutions to keep the government going until it passes a budget. Omnibus budget bills often contain policies that can’t pass on their own.
The Budgetary Process Congress and the Budget –More Reforms. Congress passed bills to try and control the deficits. By 1990, Congress focused on the increases in spending. Both parties claimed victory for the budget surpluses that began in 1997. Economic downturn, income tax cuts, and increased military expenditures brought a return to deficits by 2001.
Understanding Budgeting Democracy and Budgeting –Many politicians “spend” money to buy votes. –With many groups and people asking for government assistance, the budgets get bigger. –Some politicians compete by trying not to spend money. –People like government programs, but they really don’t want to pay for them, thus there are deficits & the public debt.
Understanding Budgeting The Budget and the Scope of Government –In sum, the budget represents the scope of government. –The bigger the government, the bigger the budget. –Limits on funding (taxes) can limit what the government can do.