Chapter 10

GOVERNMENT SPENDING

SECTION I

THE ECONOMICS OF GOVERNMENT SPENDING

Total Government Spending in 2011 was $ 3,700,000,000,000

For every man, woman, and child $ 11,878

(per capita)

Spending in the public sector made up of federal, state and local government began to rise significantly in the 1940s (FDR)

GOVERNMENT SPENDING

Spending has increased by 67% since 1947

TYPES OF SPENDING

Goods & Services Tanks, Planes, & Ships

Transfer Payments Social Security Welfare Unemployment compensation Disability Grants-in-aid (Govt. to Govt.)

Office Parks

Buildings, Schools, &

People (civilian & military)

Nondiscretionary 2/3 or 67%

Discretionary 1/3 or 33%

THE IMPACT OF GOVERNMENT SPENDING

Resource Allocation Planes vs. Schools ◊ Roads vs. Healthcare

Redistribution of Income Rich to Poor ◊ Industry to Industry

Competing with the Private Sector Hospitals ◊ Electricity ◊ Package

Delivery The Dilemma – Most people would like their taxes to be reduced. However, they don’t want to give up the programs or benefits they receive from government. Thus the government keeps on borrowing.

SECTION II FEDERAL GOVERNMENT EXPENDITURES

ESTABLISHING THE FEDERAL BUDGET

Governmental Fiscal Year 10/01 to 9/30 Starts with a request from the President Appropriations (spending) is drawn up by

House & approved by the Senate Final Approval by the President

the

BALANCING THE FEDERAL BUDGET

When spending exceeds tax revenue a budget deficit occurs. To balance the budget the government must borrow to make up the difference. Currently the government is spending approximately 40% more than it takes in.

If tax revenues exceeds spending, then a budget surplus occurs.

The chart indicates how large the deficit or surplus was as compared to the size of the economy. After World War II ended, the significant deficits

in relation to the size of the economy were during the 1980s and at present.

1969 1998 - 2001

The United States has had a budget surplus only 12 times in the last 72 years.

MANDATORY SPENDING DISCRETIONARY SPENDING Spending authorized by law

that continues without the Spending that must be approved by Congress on an annual basis.

need for annual Congress

approval of Includes the Defense Department, welfare (threshold qualifications), transportation, education, etc.

Entitlements – or spending on programs such as as Social Security, Medicare, welfare, food stamps and other programs which entitle the recipient to the benefit if they qualify for it.

FEDERAL GOVERNMENT EXPENDITURES

National defense is the largest expenditure by the Federal government. However, Social Security is set to pass defense next year. Income security consists of a wide range of programs that include retirement for federal employees (non military), subsidized housing, food stamps, and other welfare programs. Health expenditures include Medicaid, AIDS and cancer research and mental health services. Interest on the debt will eventually become a major expense as interest rates recover from historic lows.

FEDERAL GOVERNMENT EXPENDITURES - 2010

Social Security Income Security Medicare Health Interest Other

Total

20% 16% 13% 11% 4% 3% 67%

National Defense Education Justice Transportation Other

Total

20% 4% 3% 3% 3%

33%

Nondiscretionary Discretionary

U.S. NATIONAL DEBT CLOCK Outstanding Public Debt as of 01 June 2012 at 10:00:52 AM The

$ 15,720,602,388,987.40 The estimated population of the United States is 311,171,107 $50,435.11.

Each citizen's share of this debt is

The National Debt has continued to increase an average of 3.78 billion per day since January 1, 2010! During this class period the debt has increased by-- $1,575,666.00

PART II CONTINUED

STATE GOVERNMENT EXPENDITURES

Unlike the federal government, most states must balance their budget every year. States can’t barrow or print money so they must live within their means.

LOCAL GOVERNMENTAL EXPENDITURES

Local governments include county and city governments, as-well-as school districts and other fiscal interties must balance their budgets each year also. The chief responsibility of local governments

is public education.

TYPICAL STATE & LOCAL EXPENDITURES

State Intergovernmental Public Welfare Unemployment/Retire Higher Education Highways Administration Hospitals & Health Other

Total

Local Education Utilities Fire & Police Public Welfare Highways Hospitals & Health Administration Other

Total

29% 20% 11% 11% 5% 3% 5%

16%

35% 11% 7% 4% 4% 7% 5%

27%

100% 100%

Note! Unlike the Federal Government Local and State governments cannot run budget deficits. They must balance their budgets every year.

SECTION III

DEFICITS, SURPLUSES AND THE NATIONAL DEBT

Deficit Spending is spending in excess of revenues collected.

Federal Debt is the total amount borrowed from investors to finance the government’s spending.

Public vs. Private Debt Internal debt (public) is owed to trust funds External debt

(private) is owed to individuals, companies and governments.

THE DEBT Japan Italy

AS A % OF 208% 121% 103% 87% 86% 84% 77% 44% 38%

GDP (2011)

United France Britain

States

Canada Germany China Mexico

The National Debt on January 1st 1791 was just $75 million dollars. Today, it rises by that amount every hour or so. The following graph shows how the National Debt has grown year by year since 1940 in actual dollar amounts, uncorrected for inflation:

IMPACTS AND BEYOND HOW THE DEBT IS HANDLED

Crowding-out Effect When government goes to the market to borrow funds others find fewer funds available

Balancing the Budget How can we ever balance the budget? Cut spending – Raise Taxes – Growth – all of the above?

Here is a pie chart showing the makeup, or ownership, of the National Debt as of December 1998.

As you can see, the largest slice of the the Federal Reserve Bank and to other

pie, over 40%, is owed to government accounts; that

is, this part of the Debt is owed by one part of the government to another. The remaining 60% of the Debt, roughly $3.3 trillion, is privately held.