Federal Government Expenditures

• 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

Establishing the Federal Budget

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

• Executive Formulation – President establishes the general budget

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

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

Establishing the Federal Budget: Step One

• 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

Establishing the Federal Budget: Step Two

• Senate Action– May approve as sent by the House or draft its

own version – If differences exist = joint House-Senate

committee to work out a compromise

Establishing the Federal Budget: Step Three

• 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

Establishing the Federal Budget: Final Step

Major Spending Categories

• Mandatory Spending:– Social security – Income security – Medicare – Interest on the Federal

Budget – Health programs – Veterans’ Benefits

• Discretionary Spending – Education – Employment– Social services – Transportation – Administration of

Justice – Natural resources – Environment

State and Local Government Expenditures

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

• 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

Approving Spending

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

Local Government Expenditures

• Local Gov’ts include – Counties – Municipalities – Townships – School districts

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

Deficits, Surpluses, and The National Debt

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

• Historically:– Largest during WWII – 1947- 1980 budget surplus – Reagan cut taxes but increased defense

spending – 1993: Omnibus Budget Reconciliation Act

deficit began to shrink

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

From the Deficit to the Debt

From the Deficit to the Debt

• Federal Debt– Owe most of federal

debt to 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 they pay down their debt

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

The publicly held portion of the federal debt was $3.9trillion in 2003. 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?

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

Crowding out affects the allocation of resources in the economy. What happens to the interest rate

when deficit spending increases?

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

• 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

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

Taming the Deficit