Per capita -- per person In the 1940s, spending raised for two major reasons 1. Large amounts of spending required for World War II. 2. The public wanted the government to get more involved in economic affairs. Sectors of the economy (2) Public sector -- made up of the federal, state, and local governments Private sector -- made up of private individuals and businesses Public sector buys its goods and services form the private sector Kinds of Government Spending (2) 1. Goods and Services -- (i.e.. War-related materials; offices, park land; schools , laboratories, etc.; labor) Goods and services are usually public goods -- items consumed by everyone, not just the individual 2. Transfer Payments -- a payment in which the government receives neither goods nor services in return (Social Security, welfare, etc.) Types of transfer payments Grant-in-aid -- payment made from one level of government to another. Subsidies -- payments to individuals or industries to encourage or protect a certain economic activity Effects of Government Spending (3) Allocation of Resources -- governments decisions cause economic activity to change locations. Distribution of Income -- the way that money is allocated to families, individuals, and others. Competition With the Private Sector -- governments goods and services compete with private sector (i.e.. - hospitals) Review --- What are the two kinds of government spending? Topic 31 --- Federal Government Expenditures Federal budget -- an annual plan outlining proposed revenues and expenditures for the coming year. Fiscal year -- a 12-month financial planning period that may or may not coincide with the calendar year. Federal budget is established by two main phases Executive Formulation -- the budget is written of the President’s financial plan and government priorities. Congressional Action -- after approval meetings (of both the House of Representatives and the Senate the proposed budget can either be approved, modified, or disapproved. Then President signs. Federal budget deficit -- excess of federal expenditures over tax and revenue collections Appropriations Bill -- a law that sets federal money aside. Major Spending Categories (13) -National Defense -- spending by DoD & defense-related activities. -Social Security -- payments to aged and disabled Americans. -Interest on the Federal Debt -- interest on the money borrowed to make up debts -Income Security -- expenditures for retirement of railroad workers, disabled coal miners, etc. -Medicare -- health-care program for all senior citizens regardless of income -Health -- health-care services for low-income people, disease prevention, and consumer safety -(Medicaid -- a joint federal-state medical insurance program for low- income persons; largest part of health spending.) -Education, Training, Employment, and Social Services --includes block grants for education, and student loans. -Veterans’ Benefits -- very small percentage of spending -Transportation -- includes expenditures on all forms of transportation. -Natural Resources -- expenditures on preservation of the natural resources -General Science, Space, and Technology -- expenditures for National Science Foundation, etc. -Agriculture -- aid to farmers, and the Farmers Home Administration. -Other Spending --includes commerce, energy, community and regional development, justice, etc. Review --- What is a federal budget?
Balanced Budget Amendment -- constitutional amendment requiring government to spend no more than it collects in taxes revenues, excluding borrowing. Approving Spending At the state level, most states have enacted the Balanced Budget Amendment At the local level, the approval for spending often rests with the mayor, the city council, or elected official. State Government Expenditures (6) -Public Welfare -- largest category of expenditures (cash assistance, payments for medical care, etc.) -Higher Education -- help supports the state college and university outlook. -Insurance Trust Funds -- investments made for when people retire, become unemployed, etc. -Highways -- usually just state roads and link smaller communities -Hospitals -- hospitals don’t charge enough to break-even, so they look state aid. p -Interest on Debt -- usually in the form of bonds -Other Spending -- spending in corrections, health, natural resources, and utilities. Local Government Expenditures (7) -Elementary & Secondary Education -- includes teachers’ salaries, textbooks, etc. -Public Utilities -- includes water and electricity -Hospitals -- mostly city- or municipal-owned -Interest on Debt -- interest on the borrowed money to cover operating costs or capital spending. -Police Protection -- most local communities have a full-time, paid police force. -Public Welfare -- Local spend much less on this than state governments. -Highways -- Repair of potholes, street signs, and other street-related items. -Other expenditures -- most important are housing and community development, fire protection, and parks and recreation. Review --- Name some expenditures that are the same for both state and local governments.
Topic 33 --- Federal Deficits and the National Debt Deficit Spending -- spending more than is collected in revenues If the economy is stronger than expected, federal government revenues increase and expenditures decrease. If the economy is weaker than expected, federal government revenues decrease and expenditures increase.. Federal debt -- the total amount borrowed from investors to finance deficit spending by the federal government. Largest debts were around W.W.II, last surplus was under President Johnson’s fiscal year budget in 1969, deficit began to increase under Nixon and Ford administrations, large increase under Reagan’s administration. Trust Fund -- a special account used to fund specific types of expenditures (Social Security and Medicare) Gross Domestic Product (GDP) -- the dollar value of all final goods, services, and structures (homes and commercial buildings) produced within a country during any one year. Public Debt -- people owe most of the federal debt to themselves Private Debt -- debt is owed to others Importance of the Difference Between Public and Private Debt (2) 1. Repayment of Debt -- privates plan to repay borrowed money, federal government doesn’t plan Government issues new bonds when its time to pay off old ones 2. Loss of Purchasing Power -- After private individuals repay debts, purchasing power is gone, cannot buy goods and services; federal government doesn’t lose purchasing power because revenue collected is transferred to others. Impacts of the Federal Debt (3) 1. Distribution of Income -- wealthy money is borrowed, taxes fall on middle class, taxes transferred to the wealthy; middle class money borrowed, taxes fall on wealthy, taxes transferred to middle class. 2. Transfer of Purchasing Power -- people must pay more taxes, and lose purchasing power. 3. Individual Incentives -- taxes can cut down the incentives to work, save, and invest. Squandering of tax money causes the same outcome. Crowding-Out Effect -- the higher-than-normal interest rates that heavy government borrowing causes rates to go up crowding out other borrowers. Balanced Budget -- a budget with neither a surplus nor a deficit. Reasons that Graham Rudman Hollings failed to decrease the deficit (2) 1. Congress discovered that it could get around the law by passing spending bills that took effect 2 or 3 years later. 2. Economy started to decline. Attempts at decreasing the deficit -Gramm-Rudman-Hollings attempt -- failed for two reasons Budget Enforcement Act of 1990 -- can’t be evaluated for a years Omnibus Reconciliation Act of 1993 -- was intended to reduce growth of the deficit, not the deficit itself. -Entitlements -- broad social programs designed to provide minimum health, nutritional, and income levels for eligible individuals.(Social Security, medicaid, medicare, aid to the poor, etc.) Programs must be altered for Entitlements to be successful. Review --- What is the difference between Public Debt and Private Debt?