Chapter 16 Government Spending

Growth of Government

Public Works projects

Definition - publicly used facilities such as schools and highways that are built and paid for with tax dollars

Why has Government Grown

Today, total government purchases represent 19% of GDP.

This figure does not include interest payments on debt or transfer payments like welfare

If those things are included spending exceeds 1/3 of the GDP

Not included in this amount is government mandated private sector spending (like providing health care to your employees)

Functions of Government

Providing Public Goods

Promoting General Welfare

Regulation & Economic Stability

Providing Public Goods Public Goods- goods or services that can be used by many individuals

at the same time without reducing the benefit each person receives, like streetlights.

Different levels of government share responsibility for public goods like the legal system including courts, correctional institutions and law enforcement agencies

Some public goods are called merit goods (ones that is socially desirable) like ballets, museums and classical music concerts

There are also demerit goods (ones that are socially undesirable) like tobacco, alcohol and gambling. The government exercise control over these goods by taxing, regulating or prohibiting the manufacture, sale and use of them

Promoting the General Welfare

Americans have chosen to see that almost everyone in the nation is provided with a certain minimum level of support

Usually accomplished through income redistribution, or using tax receipts to assist citizens in need 2 General categories of assistance

Social Insurance programs Public Assistance programs

Social Insurance Programs Definition – government programs that pay benefits to retired and

disabled workers, their families and the unemployed

Social Security – federal program that provides monthly payments to people who are retired or unable to work

Medicare – federal program that provides low-cost health care for the elderly

Both are meant to be supplemental income supports not primary source

Workers’ Compensation – programs that extends payments for medical care to workers injured on the job

Unemployment – program to provide income temporarily to people who are unemployed through no fault of their own, must be actively seeking new employment

Public-Assistance Programs

Definition – programs that make payments to citizens based on need; also called Welfare

Supplemental Security Income – federal programs that include food stamps and payments to the disabled or aged.

Temporary Assistance for Needy Families – state run program that provides assistance and work opportunities to needy families

Medicaid – state and federal program that pays health care costs for low income and disabled persons

Regulation and Economic Stability

Stable growth, low unemployment, and low inflation are the primary economic goals of the government

Externalities – economic side effects or by-products that affect an uninvolved third party; can be negative or positive For example – a steel mill produces pollution that causes health

problems in the surrounding area, if there are no legal rules that limit pollution the steel mill does not have to correct the negative externalities

Government Regulation

Ensuring Economic Stability

Smoothing the ups and downs of the economy

Attempt to shield citizens from harmful effects like unemployment, high inflation, recessions and depressions

Critics of Government Involvement

Some critics believe that merit goods (like museums, parks and arts) should be provided by private organizations instead of the government

Critics of redistribution think that government assistance discourages personal initiative, affects incentives, and harms self-development

Critics of government regulations argue that most regulations raise prices and instead we should encourage market solutions to problems such as pollution

The Federal Budget and National Debt

The Budget Process – The goal of the budget process is to balance what the government takes in with what it spends

Budget Surplus – when the government takes in more than it spends

Budget Deficit - - when the government spends more than it takes in

Federal Taxation and Spending

The Federal Budget Process

Budget is done on a fiscal year not a calendar year

Begins October 1 and ends September 30

It takes 18 months to prepare the budget prior to its start

Begins with President and Office of Management and Budget making a plan

Plan is then submitted to Congress by January where it is examined

Proposal is submitted by April 15 for debate

Budget Process

National Debt

When a budget deficit occurs the government must raise funds by borrowing money

Deficit financing – government policy of spending more money than it is able to being in through revenues

Deficit financing is financed by selling government securities to individuals, businesses and foreign governments