Economics Chapter 10 Government Spending
Legislation intended to establish a balanced budget was the
Gramm-Rudman-Hollings Bill.
Federal government spending increased dramatically starting when?
Great Depression because the federal government took a larger role in everyday economic affairs, and because Franklin D. Roosevelt's New Deal
Government helath expenditures include a joint federal-state insurance program
Medicaid
jointly funded (federal and state) medical insurance program for low-income people
Medicaid
federal health-care program for senior citizens, regardless of income
Medicare
The office that prepares the president's annual budget proposal, reviews the budget and programs of the executive departments
Office of Management and Budget (OMB)
Which act was created in an attempt to trim $500 billion from the deficit over a five year period?
Omnibus Budget Reconciliation Act
Which of the following statements best describes the relationship of the federal deficit to the national debt?
The federal deficit leads to borrowing, which adds to the national debt.
annual budget in which expenditures equal revenues
balance budget
constitutional amendment requiring government to spend no more than it collects in taxes and other revenues, excluding borrowing many States have this, but the Federal government does NOT
balance budget amendment
Public sector spending
both directly and indirectly affects how resources are allocated
a negative balance after expenditures are subtracted from revenues
budget deficit
a positive balance after expenditures are subtracted from revenues
budget surplus
spending for federal programs that must receive annual authorization-1/3 of the federal budget Examples: national defense, OSHA, military, welfare
discretionary spending
way in which the nation's income is divided among families, individuals, or other designated groups
distribution of income
The more government borrows today, the more
future generations will have to repay.
Example of government spending competing with the private sector
government hospitals for the military or veterans compete with private hospitals -public schools compete with private school
A type of transfer payment from one level of government to another that does not involve compensation
grant-in-aid
Since the 1930s, spending by all levels of government as a percentage of GPD
has increased
Example of national debt crowding out
if the government run a deficit and tries to raise funds by selling bonds, it will cause the interest rate paid by private borrowers to go up
The largest category of state spending is
intergovernmental expenditures
funds that one level of government transfers to another level for spending
intergovernmental expenditures
What are top areas where State Government spends money?
intergovernmental expenditures (collect sales tax and allocate to local cities or counties) public welfare (Medicaid) insurance trust and retirement (money for retired state employees) higher education (state colleges and universities) highways hospitals interest on public debt
If the government achieves a balanced budget, what happens to the federal debt?
it stays the same
All levels of government combined consume about
one third of the nation output
transfer payment
payment for which the government receives neither goods nor services in return; There's 2 types: 1. grant-in aid: includes social security, welfare, unemployment compensation, and disability payments 2. subsidies
per person basis; total divided by population
per capita
a line-item budge expenditure that circumvents normal budget procedures and benefits a small number of people or businesses
pork project
The sequence for the approval of the federal budget is
president to Congress and back to president
that part of the economy made up of private individuals and businesses
private sector
requirement that new spending proposals or tax cuts must be offset by reductions elsewhere
"pay-as-you-go" provision
3 things the government could do if if there was a a surplus
1-pay off the national debt 2-spend it 3-save it
Differences between public and private debt
1. US citizens owe most of the national debt to ourselves where private debt is owed to others 2. national debt is repaid when government bonds are cashed in where private repayment is on a specific date 3. US purchasing power is not lost with national debt where private sector loses purchasing power when it borrows
Legislative measures to reduce deficits and national debt
1. balanced budget amendment 2. pay-as-you- go provisions 3. line-item veto to president 4. spending caps
discretionary spending
programs that must receive annual authorization. about 1/3 of federal budget
that part of the economy made up of local, state, and federal governments -did not begin to rise significantly until the 1940's
public sector
three ways the government spending impacts the economy (direct impact)
resource allocation distribution of income competing w private sector
mandatory spending
spending authorized by law that continues without the need of annual approvals of Congress; for example, interest payments on the federal debt. Makes up about 2/3 of federal budget
limits on annual DISCRETIONARY spending
spending cap
Example of national debt reducing economic incentives
spending money carelessly decrease desire and passion to work hard to earn more money to pay more taxes that are wasted
government payment to encourage or protect a certain economic activity
subsidy
2 transfer payments
subsidy grant-in-aids
Transfer payments from the government to individuals might be used to
support Social Security
Example of national debt redistributing income (distribution of income)
taxing the rich and giving the money to the poor in welfare payments
public sector
that part of the economy made up of local, state, and federal governments
private sector
that part of the economy made up of private individuals and businesses
What role does the Office of Management and Budget (OMB) play in establishing the federal budget?
the OMB assembles the budget under presidental guidelines
Social Security is an example of a
transfer payment
payment for which the government receives neither goods nor service in return government simply receives the tax revenue and passes it on to individuals (welfare) or States (grant-in-aid)
transfer payment
grant-in-aid
transfer payment from one level of government to another that does not involve compensation (ex. interstate highway construction, public schools)
special account used to hold revenues designated for a specific expenditure such as Social Security, Medicare, or highways
trust fund
Example of government spending affecting resource allocation
when government decides it needs more war machines, resources are used to make these instead of appliances for homes
Example of government spending affecting redistribution of income
when government decides to increase transfer payments (money to elderly or poor), the elderly and poor income increases when the government decides to decrease transfer payments, the elderly and poor's income decreases
Example of government spending increase the tax burden
when government spends more, people need to pay more in taxes
federal budget deficit
when the budget has shown expenditures to be larger than revenues
Steps in establishing the federal budget
1. budget is developed by the executive branch (president) 2. budget is then sent to the House of Representatives and they can approve it, modify, or disapprove it. They break the budget into 13 categories and assigns them to house subcommittees 3. house subcommittees prepares appropriation bills 4. House of Appropriations Committee votes on each bill 5. approved bills are sent to entire House of Representatives 6. Once approved, it is sent to the Senate. they can approve it or draft their own version 7. Congress approved budget is sent to President to sign or veto
The government spends its revenue on
1. goods and services, and 2. transfer payments
Ways to reduce deficits and national debt
1. legislative 2. raise revenue (taxes) 3. reduce spending
how can the federal debt affect the economy
1. transfers purchasing power from the private to the public sector 2. reduces incentives to work 3. crowds out private borrowers(crowding out) 4. distribution of income
It is difficult to predict deficits because
1. unexpected things happen (wars, natural disasters) 2. economy strength (strong economy means more taxes are paid; weak economy means less taxes)
when did the federal debt explode?
1980's
When was the last surplus in the federal budget?
1998
the first federal budget surplus during the past 45 years occured in
1998
since when has the balanced budget amendment been in place for CA
2004
nonpartisan congressional agency evaluates the impact of legislation and projects future revenues and expenditures that will result from legislation
Congressional Budget Office (CBO)
when does the fiscal year for the federal government start and finish?
Dec 1st to Sep 30th of the next year
part of the executive branch responsible for preparing federal budget under the presidents guidelines
President's Office of Management and Budget (OMB)
What are top areas where Federal Government spends money?
Social Security National Defense Income Security Medicare Health (Medicaid and OSHA) Interest on National Debt
States usually fund part of the expenses for
State colleges and universities Students pay the rest in tuition
In what way is the national debt different from private debt?
The national debt does not have to be repaid by a specific date
Who formulates the federal budgest?
The president
The two broad categories of government spending are
The purchase of goods and services (tanks, planes, office buildings etc) and transfer payments (social security, welfare, unemployment etc.)
grant-in-aids - examples
These are types of transfer payments: -interstate highways -construction programs -construction of new public school
fiscal year
a 12 month financial planning period that may or may not coincide with the calendar year
The federal government establishes
a budget and allocates funds accordingly.
Which of the following was the main feature of the Budget Enforcement Act of 1990?
a pay-as-you-go provision
appropriations bill
an act of Congress that allows federal agencies to spend money for specific purposes
federal budget
an annual plan outlining proposed revenues and expenditures
federal budget surplus
an excess of revenues over expenditures of $117.3 billion
Which of the following normally decreases the federal deficit?
an increase in taxes
Which of the following would be considered a grand-in-aid?
an interstate highway construction program
legislation authorizing spending for certain purposes
appropriations bill
higher than normal interest rates that heavy government borrowing causes
crowding-out effect
spending in excess of revenues collected
deficit spending
The national debt has increased dramatically because of
deficit spending.
Congress has tried a number of measures to reduce
deficits and the national debt. None have been successful
Local governments spend money mainly on
education (elementary and secondary) utilities, and public safety(fire and police) roads parks and recreation library
Of the following four categories, which accounts for the largest amount of local expenditures?
elementary and secondary education
program or benefit using established eligibility requirements to provide health, nutritional, or income supplements to individuals
entitlement
annual plan outlining proposed expenditures and anticipated revenues
federal budget
which of the following is an example of an entitlement payment?
federal money given to a senior citizen as a Social Security payment
total amount borrowed from investors to finance government's deficit spending
federal or national debt
Government policy that attempts to manage the economy by controlling taxing and spending.
fiscal policy
12-month financial planning period that may not coincide with the calendar year
fiscal year
power to cancel specific budget items without rejecting the entire budget -supreme court said it was unconstitutional
line-item veto
federal spending authorized by law that continues without the need for annual approvals by Congress-2/3 of federal budget Examples: Social Security, Income Security, Medicare, Medicaid, Interest on National Debt
mandatory spending
Budget deficits add to
national debt
Example of national debt transferring purchasing power
national debt increases taxes and when taxes increase, people have less money to spend on themselves national debt increases taxes in future generations, so the future generations have less money to spend on themselves
An ecxample of discretionary spending is financing for
national defense
Which of the following is an example of discretionary spending?
national defense
