GOVERNMENT SPENDING

1. GOVERNMENT SPENDING

2. Government Spending in Perspective • In 2003 – approx. $3 trillion or about $10,300 for every man, woman and child B. The events of the 1930’s and 1940’s set the stage for unprecedented government growth in spending C. Government spending affects resource allocation and distribution of income

3. II. Two Kinds of Spending • Goods and Services – tanks, land, ships, office buildings, schools, paper, soap, salaries for all workers etc. • Transfer Payments – Social Security, welfare, unemployment compensation to those who need the assistance. Also grants-in-aid which are intergovernmental spending for things like highways, new schools, farm programs etc.

4. Impact of Government Spending • Resource allocation – the government must pick and choose how to use its resources. It chooses whether to spend on missile systems or education or whether to support certain industries and not others • Redistributing Income – incomes are affected when the gov’t decides where to spend money and where not to.

5. C. When the government produces goods and services it often competes with the private sector

6. Section 2 • Establishing the Federal Budget • The federal budget consists of (1) mandatory spending, which includes interest payments, Social Security, and Medicare (2/3 of the budget) and (2) discretionary spending, which includes programs that Congress must approve annually (1/3 of the budget) • The government’s fiscal year is from October 1 to September 30.

7. First step in adopting a budget is executive formulation – the President confers with his advisors and drafts a budget which he submits to Congress • The second step is House action – Congress has the power to approve, modify, or disapprove the president’s proposed budget. The House sets budget targets for each category of the discretionary budget, then assigns appropriations bills to various subcommittees to be debated and approved. It then goes to the entire House for a vote. These steps must be completed by September 15 each year.

8. E. The third step is Senate action – the 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. F. The last step is final approval by the House and the Senate. Once signed by the President, it becomes the budget for the year.

9. II. Major Spending Categories • Mandatory spending includes: Social Security, income security, Medicare, interest on the debt, health programs, and veteran’s benefits • Discretionary spending includes: education, employment, social services, transportation, justice, natural resources, and the environment (See pages 262 and 263)

10. Section 3 – State and Local Spending • Approving Spending • Similar process as the Federal Gov’t • Some states have a balanced budget amendment • Local governments empower the mayor, council, or commission to approve the budget

11. State Government Spending Eighty 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 twenty percent is spent on a variety of expenses, such as corrections, health, natural resources, and utilities

12. Local Government Spending • Local governments include counties, cities, townships, school districts, and other special districts. • The largest category of spending (about 2/3) include elementary and secondary education, public utilities, hospitals, police, interest on debt, public welfare and highways. The other 1/3 includes spending on housing, community development, fire, and parks and recreation. ( page 269)

13. Section 4 • From Deficit to Debt • Government has practiced deficit spending for years. 1998 saw the first surplus in 29 years • Largest deficits during WWII; surplus by 1947 and then deficit spending of the 80’s • When the budget runs a deficit, the Treasury Department sells bonds to the public to raise money. The federal debt is the total amount of continuous deficit spending

14. The total debt was $6.74 trillion in 2003. E. -We owe most of this debt to ourselves -Federal debt does not have a repayment deadline - When the government repays a debt, the funds transfer to others who gain purchasing power ( about 15-20% of debt owed to foreigners)

15. II. Impact of the National Debt • Interest on debt causes loss of private sector transfer payments • If taxes are increased to pay the debt, it may diminish incentives for Americans to work, save, and invest • In selling bonds, the federal government competes with the private sector for scarce resources which leads to higher than normal interest rates

16. Taming the Deficit • Congress tried to mandate a balanced budget in 1991 through the Gramm-Rudman-Hollings Act. It failed because Congress passed spending bills in spite of the law • The Budget Enforcement Act required that Congress must “pay as it goes” by offsetting any new spending with cuts elsewhere. This also failed • The Omnibus Budget Reconciation Act of 1993 only reduced the rate of growth of the deficit

17. Congress gave the president a line-item veto in 1996 but the SC struck it down • Due to the 2001 recession, 9/11, the war on terrorism, and the continued growth of entitlements, the government is facing record deficits