Chapter 10

Section 1The Economics of

Government Spending

Government Spending in Perspective

• Per Capita – per person– in 2003, the U.S. per capita expenditures

was $10,300

• Public Sector – the part of the economy made up of federal, state, and local governments

Reasons for Expanding the Public Sector by 1940

1. Expenses of WWII

2. Change in public opinion – they felt government should play a larger role in everyday economic affairs

3. Success of large-scale public works projects ( roads, social security )

• Over time, people started to question how much the government should become involved

• Private Sector – the part of the economy made up of private individuals and privately-owned businesses

Two Kinds of Spending

1. Goods and services – tanks, planes, land, schools

2. Transfer Payments – a payment for which the government receives neither goods nor services in return

• Social security, welfare

Section 2

Federal Government Expenditures

• Every year the government creates a federal budget – an annual plan for

the revenues and expenditures

• The federal budget is for a fiscal year – a 12 month planning period

(Oct. 1 – Sept. 30)

Steps to Make a Federal Budget

1. President creates budget guidelines

• Federal Budget Deficit – excess of expenditures over revenue (spending

more than taken in with taxes)

2. Approval by the House

3. Approval by the Senate

Major Government Spending

• Social Security• National Defense• Medicare – government healthcare for

senior citizens • Medicaid – government healthcare for

low income individuals

Medicaid Usage

Section 3

State and Local Government Expenditures

• States must get approval before spending revenue dollars

• Balanced Budget Amendment – requires annual spending to not exceed revenues brought in– States cut spending

when revenues drop; unlike federal government

State ExpendituresMajor types of state expenditures:

• Intergovernmental expenditures• Higher education• Public welfare

Local Government Expenditures

Local governments have a

responsibility for: – elementary and

secondary education

– police forces– highways

Section 4

Deficits, Surpluses, and the National Debt

The National Debt• Deficit spending – spending in excess

of revenues collected (spending more than tax money coming in)

Deficits Add to the Debt

• When the federal government runs a deficit, it makes up for the shortage of money by borrowing from others

• Federal Debt – the total amount borrowed from investors to finance the government’s deficit spending

Federal Debt: Nixon to Obama

**if the federal government generates a surplus, the federal debt will become smaller***

National Debt

• Some of the debt is money the government owes to itself

• Trust Funds – special accounts used to fund specific types of expenditures

• Social Security and Medicare

Public Vs. Private Debt• The difference…

–When private citizens borrow money they make plans to repay by a specific date, and have a debt collector to answer to

– The government does not have a specific date to pay things off, or anyone else to answer to

Impact of the National Debt

• Affects the distribution of income within the economy

• Causes a transfer of power from the private to public sector

• High taxes needed to pay off the debt can reduce the incentives to work, save, and invest

Taming the Deficit

• Budget Enforcement Act of 1990• “Pay-as-you-go” Provision – a

requirement that new spending proposals or tax cuts must be offset by reductions elsewhere

• Balanced Budget Agreement of 1997• Spending Caps – legal limits on annual

spending