Transcript The Federal Budget

The Federal Budget
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Who Decides?
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Law
President
Realities of political system
“Power of the Purse” with Congress
– Constitution does not specify HOW Congress does
this
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Appropriation Bills
• Specify how much money will go to different
agencies and programs
• Legislation must be passed to give the federal
government the legal authority to spend the
money (authorization bills)
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Mandatory Spending
• Government must (by law) pay out benefits to
all eligible recipients
– Example: Social Security
– Made up of mostly earned – benefit programs
– Spending is determined by eligibility rules
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Mandatory Spending
• Example:
• Congress decides to create a program like the
Supplemental Nutrition Assistance program
(SNAP) (know as food stamps)
– Set a criteria for who is eligible
– Amount of money is determined each year is
determined by how many people are eligible
– Congress can change the eligibility rules
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• Mandatory spending makes up nearly 2/3s of
total federal budget
– Social Security is the largest
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Discretionary Spending
• Spending that goes through annual
appropriations process each year
• Congress sets the level of spending on
discretionary programs
• (Congress can choose to increase or decrease)
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TAX BREAKS
• When the government gives a tax break it is
choosing to give up tax revenue
• This is done to benefit society
• Tax breaks are expected to cost the federal
government 1.24 trillion in 2015
– Examples: low taxes on capital gains, home
mortgage interest
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The Federal Budget
Two Key Terms needed for
understanding the Budget:
Contrast Deficit versus Debt (how related?)
Budget Deficits
The amount by which
government spending
exceeds government
revenues in a single
year.
National Debt
The total amount of
money the federal
government owes to
pay for accumulated
deficits.
Over $9,500,000,000,000
(Almost 70% of GDP)
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Debt/Deficit
• Government debt is the total of all past
government deficits. For example, if the
government runs deficits of $1 billion a year
for ten years, the addition to debt is $10
billion
• The federal debt is held by the public, as a
percentage of GDP
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Budgets, Deficit Spending, & National Debt
• The Growing Federal Budget (Outlays):
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George Washington’s Budget=> $3-5M per year
Post Civil War costs=> $1B+ then down again
WWI=> back up to $1B
1962=> $100B
1987=> $1 Trillion ($1,000,000,000,000)
2001=> $1.8 Trillion
2003=> $2.212 Trillion
2004=> $2.272 Trillion
2005=> $2.338 Trillion
2006=> $2.5 Trillion
2007=> $2.77 Trillion
2008=> $2.8885 Trillion
– 2009=> $3.1 Trillion
(President Bush’s Budget submit- Feb 2008)
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The Rise and Fall of Deficit Spending
• 19th Century=> Balanced Budget (w/few exceptions)
• Budget Deficits => Key contributing events:
– 1930s => FDR’s New Deal programs
– 1940s => WWII
– 1960s => LBJ’s War on Poverty & Vietnam War
– 1980s => Reagan Tax cuts & rise of Defense spending
– 1990s => Clinton Tax increase & Economic growth
• (Brief period of budget surplus- late 1990s-early 2000)
– 2003-09 => Bush Tax cut, Econ downturn, 9/11, Iraq War,
Katrina & other natural disasters, oil shock, etc
– (Return to budget deficits for indefinite future)
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The Ideal Budget?
Receipts ($$$ in) = $pent (Outlays)
Balanced Budget
Budget Surplus
OR
A federal budget in
which spending and
revenues are equal.
A federal budget in
which revenues
exceed spending.
How has Federal Government faired in meeting this “ideal” criteria?*
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Budget Deficits & Surplus Over Time
2005 2006 2007 2008 2009 2010 2011 2012
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239B
248B
$427B
410B
377B
407B
415B
457B
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Consequences of a Large National Debt
• Is debt always bad? (investment vs. consumption)
– Depends: Tuition for College versus Spring Break Vacation
• When Government borrows $$$ => from whom?
– Pays Interest on $$=> US & Foreign investors, Fed. Pensions
• The trade offs:
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Lost opportunities (discretionary spending)
Impact on interest rates?
($$ too expensive)
Impact on private sector growth?
Impact on jobs? => consumer spending?
Impact on economic growth=>
Impact on the National Economy (GDP)?
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Government Revenue
• Where Does Government Revenue Come From?
• Government Revenue in Historical Perspective:
– Changes over time*
– Social Security Act of 1935 (FICA)*
• The *Federal Insurance Contributions Act (FICA) tax is a
United States payroll (or employment) tax[1] imposed by
the federal government on both employees and
employers to fund Social Security and Medicare
• FICA contributions have increased over time=>
– (increased deductions from your paychecks)
• Result: FICA contributed more & more to Federal
revenues*
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Government Revenue Sources- 1900
45%
55%
Custom Duties
Excise Taxes
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Government Revenue Sources- 1960
23%
44%
4%
Income Taxes
Excise Taxes
Payroll Taxes
Estate, Customs
Corporate
16%
13%
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Government Revenue Sources- 2005
What tax source has increased the most in a relatively short time?
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Payroll Taxes versus Income Taxes
Contrast the different types of taxes:
 Progressive tax (what is it & why is it progressive?)
 Regressive tax (what is it & make makes it regressive?)
?_____________ Tax
A tax system in which those
with high incomes pay a
higher percentage of their
income in taxes than those
with low incomes.
?_____________ Tax
A tax system in which
those with high incomes
pay a lower percentage of
their income in taxes than
those with low incomes.
How does US Tax burden compare with other Industrial Nations?
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Comparing Tax Burdens
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Where Does Government Spending Go?
• The Changing Nature of Government Spending:
– Changes over time
– Shift from Cold War Defense spending to Human Resources
Federal Spending by Type
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Federal Spending
What has triggered this increase in Federal spending on individuals?
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Entitlement Expenditures
Discretionary vs.
Non-discretionary
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$1.481 Trillion
$857 Billion*
19%
9%
*How has Discretionary spending changed over time?
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Decreasing Discretionary Spending
How can we increase Discretionary spending?
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Limiting Entitlement Programs
• Areas requiring special attention:
– Long term budget problems
(the Baby Boomers)
• Social Security concerns & escalating Health Care costs
– Difficulty restraining growth of entitlement programs
– Need for more revenue (Taxes vs. Economic growth)
• Cutting costs: Political will vs. political costs
– Political Costs of cutting Entitlement Programs is normally
greater than the political benefits & will necessary to do it
• Another problem in the Budget Process is:
– Controlling Pork barrel (“ear marks”) politics *
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Problem in the Budget Process
Pork Barrel
Spending
Legislation that appropriates
Federal money for local
projects of questionable
value that may ingratiate a
legislator with his or her
constituents.
• Controlling Pork barrel* politics:
– Easier said than done=> conflicting objectives:
– One man’s pork is another’s vital program
– Incumbent objective: improve reelection chances:
• Vehicle for “pork” => bill riders & “ear marks” – Example?
• Senator Ted Stevens & Alaska’s “Bridge to nowhere”
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Corporate Welfare
• Another example involves Government subsidies
or tax breaks for businesses
– AKA: Corporate Welfare
Corporate Welfare
Government subsidies or
tax breaks of
questionable value to
private corporations.
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Responsibility for Budget Deficits
• Congress and the President
– Role in perpetuating budget deficits=>
– Decisions on programs, spending levels, & taxes
• Congressional appropriations & Presidential veto
• Pork Barrel politics. Earmarks, & Budget riders*
• *Usually attached to last minute Omnibus “must pass” Bills
– Classic example: April 2007 Defense Supplemental
• The American Public
– Congress responds to the wishes of the voters
– Balancing the budget vs. preserving key programs
• Top tax breaks favored by public (Figure 16-8)*
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Top Tax Breaks
$400+ Billion in lost
annual revenue
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The Budgetary Process - Historic overview
• Budgetary Process from George Washington to Nixon:
– Key Change: Budget & Accounting Act of 1921 =>
• Power of President’s control over Executive Branch enhanced
• The President submits consolidated Budget to Congress from then on…
– Office of Management & Budget (OMB) – Nixon reforms in 1970
• Little change in Budget process until 1974:
– (The President proposes and Congress disposes):
The President
submits a budget
to Congress
Lets examine in more detail
Congress must
then approve
the budget(or not)
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The (2 Year) Budget Process
FY 2008 Budget
FY 2009 Budget
FY 2010 Budget
Theory vs. reality!
New
Fiscal Year
Role of Continuing Resolutions (Reality)
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Budgetary Reform Attempts (1970-2000)
• Both Congress & the President have attempted to make the
Budget process more rationale & disciplined thru reforms
– Nixon impounded $$$ to slow spending & deficit growth
– Democratic Congressional reaction:
• Congressional Budget & Impoundment Act of 1974
• Establishment of Congressional Budget Office (CBO) vs. OMB
• Divided government (Different Parties hold Executive & Congress)
– Conflicting budget priorities (President vs. Congress)
– Result: Continuing resolutions
• Bottom Line:
– Changing the rules has failed to overcome basic disagreements
between a GOP President and a Democratic held Congress 37
Budgetary Reform in the 1980s
• Congress passed the Gramm-Rudman Reform in an attempt
to bring fiscal discipline to the Budget process:
– Goal: Reduce deficits (result?)
– Growing deficits continued
– Partisan disagreement over budget priorities trumped reforms
• Key influence (again): Divided Government
– Lack of consensus & political will
– President Reagan (GOP) pushed for Tax cuts & strong Defense
– Congress (Democrats) desired to protect domestic programs ($$)
• Result: increased defense spending & tax cuts=> (but)
– Not offset by cuts in domestic programs=> result?
– Historic level deficits ensued
– (And it’s not that much different from what we are seeing now)
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Deficits to Surpluses & Back Again
• 3 Serious attempts to reduce deficit spending made in 1990s
• Budget Enforcement Act (BEA) of 1990
– Set limits on spending growth & imposed sanctions
– Three separate categories “walled off” from changes
• Defense, domestic policy, & international affairs
• Increases must be offset by program cuts within own “walls”
• (No robbing Defense to pay for domestic program increases)
• Clinton Budget for 1993
– Some program cuts & higher taxes raised- result:*
– Deficits begin to gradually fall very slowly for first time
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Budget Deal of 1997
• Let’s make a deal: (Clinton & the GOP Congress)
– GOP Aim: balanced budget by 2002
• GOP promise made in Contract with America
• Reality: Presidents have a vote too (veto)
– Forced compromise=> major cuts in Federal programs
– Surplus first appeared in 1998 (first since 1969)
• Combined effects of all of above (Table 16-1)
– Growth of Deficits began to decline & then disappeared
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Surpluses Until the Bubble Burst
• By 2002: Deficit Spending had returned – why?
• Combination of several factors:
– 2000=> Technology Bubble burst=> $$$ recession
– Stock Market freefalls (NASDQ down by 60%)
– Corporations cut spending & Job losses grew
– 9/11/2001 => another major shock to economy
– People sold more stocks, stop flying=> airlines failed
• Then- additional economic problems emerged:
– Cost of Katrina & other natural disasters
– Growing energy costs (oil & natural gas)
– Rise in DOD spending & growing cost of Iraq War ($500B)
– Finally: Tax cuts not offset by cuts in Federal spending41
Is the Budget Process Irrational?
• Role of past Budgets amount to tinkering at the margins
– Incremental Budgeting=> autopilot budgeting
– Zero based budgeting=> too hard & disruptive
• Mechanical systems of reform as a substitute?
– Conclusion: The Budget cycle was not a
substitute for fiscal discipline
– Political Realities dictate political behavior
• The dirty little secret in Washington is:
– Political priorities determine budget fiscal priorities
– (& Divided Government results in conflicting priorities)
– Politicians respond to conflicting Public (or voter) demands
• & will do whatever is most likely to get them reelected
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Back-up Slides
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Actual GDP growth: 2.2% in 2007
& 1.5% projected for 2008 (IMF)
Deficit as a % of GDP
Any Problem with the Administration’s Projections?
Problem: Based on assumptions that GDP will grow 3.3%,
& Federal revenues will steadily increase as a result.
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Social Security & Medicare Trends
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Government Revenue Sources- 2000
10%
5%
50%
32%
Income Taxes
Excise Taxes
Payroll Taxes
Estate, Customs
Corporate Taxes
3%
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Review: Budget Deficits & Surplus Over Time
2005 2006 2007 2008 2009 2010 2011 2012
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239B
248B
379B
377B
382B
$427B
415B
457B
How does Congress contribute to Budget Deficits? What’s the problem?
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