Government Spending

1. Government Spending Chapter 10

2. Chapter Essential Questions 10.1 EQ: What are 2 kinds of government expenditures? 10.2 EQ: What 4 steps must be taken to ensure the approval of the Federal Budget? 10.3 EQ: What are some of the things that the state and local governments spend their budget on? 10.4 EQ: What is the impact of the federal debt on the economy?

3. 10.1 The Economics of Govt. Spending

4. I. Govt. Spending in Perspective A. Public Sector: Part of the economy made up of federal, state, and local government. • Spending began to increase in the public sector starting in 1940’s. • After World War II and Great Depression. Citizens needed help. B. Private Sector: part of the economy made up of private individuals and privately-owned businesses.

5. Two Kinds of Spending 1. Purchase of Goods and Services i. The government buys many goods and services such as tanks, planes, ships, office buildings, skilled workers, salaries. 2. Transfer Payments i. Payment in which government receives neither good nor service in return. Ex: Social Security, Welfare, unemployment, disability aid.

6. ii. Grant-in-aid a. Transfer payment one government level makes to another. b. Ex: Interstate Highway Construction. Building new public schools.

7. III. Impact of Government Spending A. Government spending affects resource allocation because purchase decisions, subsidies, and transfer payments either stimulate economic activity or affect the Factors of Production. B. Govt. 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. C. Govt. spending creates competition with the private sector.

8. 10.1 EQ • What are 2 kinds of government expenditures? • Goods and services • Transfer Payments

9. 10.2 Federal Government Expenditures

10. I. Establishing the Federal Budget A. Federal Budget • Annual plan outlining proposed revenues and expenditures for the coming year. i. Two-thirds of the federal budget consists of mandatory spending. a. Social Security, Medicare, borrowed money. ii. Remaining one-third of the budget deals with discretionary spending. a. Spending on schools, military, coast guard, welfare, etc.

11. B. Federal Budget prepared for fiscal year: -12 month plan outlining proposed revenues and expenditures for upcoming year. i. Starts October 1 – End September 30. C. After budget is set the house decides what to spend the discretionary spending. i. Appropriations Bill: An act of Congress that allows federal agencies to spend money for specific purposes. -Bill must be approved.

12. …continued b. After House approves it is sent to the Senate. i. After House and Senate approve – sent to President’s desk for signature. ii. Once signed the appropriation bill becomes the official document for the next fiscal year.

13. Discussion Question • What problems may arise when the president and the majority of Congress are from different political parties? • Congressional leaders may have spending priorities widely differ from the president’s priorities

14. A. Mandatory spending categories include: Social Security; income security; medicare; interest on the federal debt; some health programs; and veterans’ benefits. B. Discretionary spending categories include: education; employment; social services; transportation; administration of justice; natural resources and environment

15. 10.2 EQ Use your textbook if necessary: What 4 steps must be taken to ensure the approval of the Federal Budget? 1. Executive Formulation 2. Action by the House 3. Action by the Senate 4. Final Approval

16. 10.3 State and Local Expenditures

17. I. Approving Spending A. States enact a balanced budget amendment: Constitutional Amendment that requires that annual spending not exceed revenues. (duh) B. Most states approve their budgets using a process similar to the federal government’s process. C. Local govts. empower representatives- the mayor, city council, or county judge- to approve the budget

18. II. State and Local A. State: • Highway construction, college aid, welfare assistance, welfare institutions. B. Local: • Elementary and Secondary education, utilities, police, fire department, local streets.

19. 10.3 EQ What are some of the things that the state and local governments spend their budget on? (list at least 3 for each)

20. 10.4 Deficits, Surpluses, and The National Debt

21. I. From Deficit to Debt A. Many times the government is forced to spend more than it collects. • Deficit Spending: spending in excess of revenues collected. B. When government reaches deficit it must borrow from others. • How? Selling bonds to the public.

22. C. Debt i. Federal Debt: total amount borrowed from investors to finance government’s deficit spending. ii. How Big is the National Debt? • $8 trillion!!!

24. II. Taming the Deficit A. Budget Enforcement Act of 1990 • “Pay as you Go” – new spending proposals must be offset by reductions elsewhere. B. Omnibus Budget Reconciliation Act of 1993 • Attempt to trim $500 billion over a five-year period.

25. …continued C. Balanced Budget Agreement of 1997 • Line-item veto: power to scratch out certain items in budget without rejecting all of it. • Cuts in health, science, and education.

26. III. Success then Failure A. 1998 – finally had a surplus year. B. Recession in 2001 and terrorist attack led to more government spending. • Deficit spending again. C. Entitlements: social programs that use established eligibility requirements. i. Social Security, Medicare, Medicaid. ii. Mandatory spending category – people living longer, more people meeting requirements.

27. 10.4 EQ What is the impact of the federal debt on the economy?