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1
Splash Screen
Chapter 10
Government Spending
2
Section 1-4
Introduction

• Government is big business in America. ?

• In fact, all levels of government in the United
  States spend more than all privately owned
  businesses combined. ?
• Government is a major player in our economy due
  to its enormous expenditures.

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Section 1-4
Did You Know?

• Between 1962 and 1993, federal transfer payments
  to people eligible for benefits because of
  poverty rose from under 1 percent of the nations
  Gross Domestic Product (GDP) to just about 2.5
  percent. In contrast, at the height of World War
  II (the early 1940s), federal spending on defense
  was 40 percent of GDP. In 2001 the total
  government expenditures at all levels amounted to
  about 30 percent of GDP.

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Section 1-5
Government Spending in Perspective

• Total government expenditures at all levels was
  almost 3 trillion in 2003about 10,300 for
  every American. ?

• Government spending did not begin to increase
  until the 1940s for three reasons (1) high costs
  of World War II (2) the Great Depression changed
  public opinion about the government assisting in
  everyday economic affairs and in improving
  Americans economic welfare and (3) the success
  of large-scale public works projects.

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Section 1-6
Government Spending in Perspective (cont.)

• Debate continues over the role government should
  play in the economy. Government promotes the
  broad social and economic goals of Americans, but
  the benefits of a government policy should
  outweigh its costs.

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Section 1-7
Government Spending in Perspective (cont.)
Figure 10.1
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Section 1-9
Two Kinds of Spending

• Government spending is for the purchase of goods
  and services and payments to disadvantaged
  Americans. ?

• Goods and services that the government buys
  includes everything from tanks for the nations
  defense to paper and soap for its employees.

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Section 1-9
Two Kinds of Spending (cont.)

• Transfer payments include Social Security,
  welfare, and unemployment compensation. Two
  kinds of transfer payments exist. If the payment
  is made from one level of government to another,
  it is called a grant-in-aid. Subsidies are
  payments made to individuals or entire industries
  to encourage or protect a certain economic
  activity.

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Section 1-10
Two Kinds of Spending (cont.)
Figure 10.2
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Section 1-13
Impact of Government Spending

• Government spending affects resource allocation
  because purchase decisions, subsidies, and
  transfer payments either stimulate economic
  activity or affect the factors of production. ?

• Government spending influences income
  distribution when transfer payments increase
  family incomes, federal projects provide or take
  away jobs, and subsidies give income support to
  American workers. ?

• Government spending creates competition with the
  private sector.

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End of Section 1
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Section 2-4
Introduction

• Taking action on spending bills is but one step
  in the preparation of the federal budget an
  annual plan outlining proposed revenues and
  expenditures for the coming year. ?

• Approximately two-thirds of the federal budget
  consists of mandatory spending spending
  authorized by law that continues without the need
  for annual approvals of Congress.

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Section 2-5
Introduction (cont.)

• Mandatory spending includes interest payments on
  borrowed money, Social Security, and medicare. ?

• The remaining one-third of the budget deals with
  discretionary spending programs that must
  receive annual authorization. ?

• Discretionary spending decisions include how much
  to spend on programs such as the military, the
  Coast Guard, and welfare.

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Section 2-6
Establishing the Federal Budget

• The federal budget consists of (1) mandatory
  spending, which includes interest payments on
  borrowed money, Social Security, and medicare
  (two-thirds of the budget) and (2) discretionary
  spending, which includes programs that congress
  must approve annually (one-third of the budget). ?

• The governments fiscal year is from October 1 to
  September 30.

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Section 2-6
Establishing the Federal Budget (cont.)

• The second step is House actionCongress has the
  power to approve, modify, or disapprove the
  presidents proposed budget. The House sets
  budget targets for each category of the
  discretionary budget, then assigns appropriations
  bills to various subcommittees where subcommittee
  members study and debate each bill. If the bill
  is approved in subcommittee, it is sent to the
  full House Appropriations Committee. If approved
  there, it goes to the entire House for a vote.
  All these congressional steps must be completed
  by September 15 each year.

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Section 2-6
Establishing the Federal Budget (cont.)

• The third step is Senate actionthe Senate may
  approve the House bill or it may draft its own
  version. If differences exist, a joint
  House-Senate conference committee works out a
  compromise bill. ?

• The last step is final approvalthe House and
  Senate send the bill to the president for his
  approval or veto. Once signed, it becomes the
  official budget for the new fiscal year.

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Section 2-14
Major Spending Categories (cont.)

• Mandatory spending categories include Social
  Security income security medicare interest on
  the federal debt some health programs and
  veterans benefits. ?

• Discretionary spending categories include
  education, employment, social services,
  transportation, administration of justice,
  natural resources, and the environment.

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Section 2-13
Major Spending Categories
Figure 10.4
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End of Section 2
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Section 3-4
Introduction

• State and local levels of government, like the
  federal government, also have expenditures. ?

• Like the federal government, these governments
  must approve spending before revenue dollars can
  be released. ?

• The budget process at the state and local levels
  can be just as complicated as it is at the
  federal level.

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Section 3-5
Approving Spending

• Most states approve their budgets using a process
  similar to the federal governments process. ?

• Some states have a balanced budget amendment that
  requires annual spending not to exceed revenues. ?

• Local governments empower representativesthe
  mayor, city council, or county judgeto approve
  the budget.

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Section 3-7
State Government Expenditures

• Eight percent of state spending is directed
  toward intergovernmental expenditures, public
  welfare, insurance trust funds, higher education,
  highways, hospitals, and interest on the public
  debt. The other 20 percent is spent on a variety
  of expenses, such as corrections, health, natural
  resources, and utilities.

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Section 3-9
State Government Expenditures (cont.)
Figure 10.5
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Section 3-10
Local Government Expenditures

• Local governments include counties,
  municipalities, townships, school districts, and
  other special districts. ?

• The largest categories of spending (about
  two-thirds of the total) include elementary and
  secondary education public utilities hospitals
  police protection interest on debt public
  welfare and highways. The other third includes
  such expenses as housing and community
  development, fire protection, and parks and
  recreation.

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End of Section 3
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Section 4-4
Introduction

• In 1998 the federal budget had its first surplus
  in 29 years. ?

• The surplus did not last long, however, as the
  recession of 2001 reduced tax receipts while
  politicians simultaneously opted for tax cuts
  rather than debt reduction. By 2002, federal
  deficits were back.

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Section 4-5
From the Deficit to the Debt

• Throughout United States history, the federal
  government has practiced deficit spending, or
  spending more than the revenues it collected. In
  1998 the federal budget had its first surplus in
  29 years. ?

• Historically, the largest federal deficits
  happened during World War II. The budget,
  however, had a surplus by 1947, which lasted
  until the 1980s, when the Reagan administration
  increased defense spending and cut taxes. It was
  not until after the Omnibus Budget Reconciliation
  Act of 1993 that the deficit began to shrink.

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Section 4-6
From the Deficit to the Debt (cont.)
Figure 10.6
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Section 4-5
From the Deficit to the Debt (cont.)

• When the budget runs a deficit, the Treasury
  Department sells bonds to the public to raise
  money. The federal debt is the total amount the
  government has borrowed from investors to finance
  its deficit spending over its long history. ?

• The total federal debt had grown to 6.74
  trillion by 2003. About 1.9 trillion is trust
  fund money the government owes itself, which
  economists do not include in the total as
  economically significant.

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Section 4-9
From the Deficit to the Debt (cont.)
Figure 10.8
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Section 4-5
From the Deficit to the Debt (cont.)

• The federal debt differs from private debt
  because (1) we owe most of the federal debt to
  ourselves, whereas private debt is owed to
  others (2) private debt typically has a
  repayment deadline, but federal debt does not
  the government just issues new bonds (3) private
  debt means individuals give up their purchasing
  power as they pay down their debt but when the
  federal government repays a debt, the funds
  transfer to others who gain purchasing power
  (unless payments are to foreign investors).

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Section 4-11
From the Deficit to the Debt (cont.)
Figure 10.7A
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Section 4-12
From the Deficit to the Debt (cont.)
Figure 10.7B
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Section 4-13
From the Deficit to the Debt (cont.)
Figure 10.7C
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Section 4-16
Impact of the National Debt

• The federal debt causes a transfer of purchasing
  power from the private to the public sector. The
  larger the federal debt, the larger the interest
  payments, and the more taxes the government must
  pay. ?

• If taxes are increased to make the federal debts
  interest payments, it may diminish incentives for
  Americans to work, save, and invest. ?

• In selling bonds to raise money, the federal
  government competes with the private sector for
  scarce resources, leading to higher-than-normal
  interest rates.

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Section 4-18
Impact of the National Debt (cont.)
Figure 10.9
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Section 4-19
Taming the Deficit

• Congress tried to mandate a balance budget in
  1991 through the Gram Rudman-Hollings Act. GRH
  failed because Congress passed spending bills in
  spite of the law. ?

• The Budget Enforcement Act required that Congress
  must pay as it goes. It must offset any new
  spending with making reductions elsewhere. BEA
  failed.

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Section 4-19
Taming the Deficit (cont.)

• The Omnibus Budget Reconciliation Act of 1993
  only succeeded in reducing the rate of growth of
  the deficit, not the total deficit. The act
  combined spending reductions with tax increases,
  leading to the surplus by 1998.

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Section 4-19
Taming the Deficit (cont.)

• Congress gave the president a line-item veto, but
  the Supreme Court found it unconstitutional. The
  Balanced Budget Agreement of 1997 followed, with
  rigid spending caps so Congress could balance the
  budget by 2002. In 1999 congress increased
  defense spending and cut taxes as a consequence,
  they had to cut popular programs such as health,
  education, and veterans programs. ?

• The federal government faces rapid growth of
  entitlements.

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End of Section 4
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Chapter Summary 1
Section 1 The Economics of Government Spending

• Government spending takes the form of
  expenditures on goods and services, most of which
  are public goods, and on transfer payments such
  as grants-in-aid for which the government
  receives nothing in return. ?

• Government spending influences the private sector
  by affecting the allocation of resources, the
  distribution of income, and by competing with the
  private sector for scarce resources.

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Chapter Summary 3
Section 2 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
  it separately. ?
• Discretionary spending is broken down for action
  by various committees that propose appropriations
  bills. The budget is reassembled and voted on by
  the House and the Senate.

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Chapter Summary 4
Section 2 Federal Government Expenditures (cont.)

• If differences between the House and the Senate
  emerge, a compromise bill is developed on which
  both vote. ?

• The largest components of the federal budget are
  Social Security, national defense, income
  security, medicare, net interest on the federal
  debt, and health.

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Chapter Summary 5
Section 3 State and Local Government
Expenditures

• State budgets go through an approval process that
  varies from state to state. The largest state
  spending categories are intergovernmental
  expenditures, public welfare, insurance trust,
  and higher education. Others include highways,
  hospitals, and interest on state debt. ?

• The largest single category of spending for local
  governments is elementary and secondary
  education. Public utilities, hospitals, police
  protection, interest on debt, public welfare, and
  highways follow.

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Chapter Summary 7
Section 4 Deficits, Surpluses, and the National
Debt

• 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 reached 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 and incentives to work, save,
  and invest may also be altered.

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Chapter Summary 8
Section 4 Deficits, Surpluses, and the National
Debt (cont.)

• 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 a
  threat to future budget surpluses.

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End of Chapter Summary
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