Government FinancesChapter 25

The Federal GovernmentSection 1

Preparing the Budget

• Budget= the blueprint for how the government will raise and spend money.

• The government uses a fiscal year (FY), a 12-month period that may or may not match the calendar year.– Federal government budget year begging

October 1 and ends on September 30 the following year and must be renewed at that time.

The Budget Process

• By the first Monday is February, the president proposes a budget to Congress outlining how the government should spend its money.

• Congress then passes a budget resolution.– This document totals revenues and spending

for the year and sets targets for how much will be spent in various categories.

Federal Budget

Two types of Spending

• Mandatory Spending= Spending that does not need annual approval.– Social Security Checks– Interest payments on government debt

Two Types of Spending

• Discretionary Spending= Government expenditures that must be approved each year.– Money for highway construction and defense.– Makes up 1/3 (33%) of the Federal budget.

Appropriations Bills

• These are laws that approve spending for a particular activity.

• Appropriations bills always begin in the House of Representatives

• Must be approved by both houses and either signed into law or vetoed by the President.

Revenues

• Nearly ½ of the Federal government’s revenue comes from the income tax paid by individual Americans.

• Payroll taxes are the second largest source of Federal income.– Social Security—provides money to people

who are retired or disabled.– Medicare—pays some health care costs of

elderly people.

Other Sources of Revenues

• Excise tax when you purchase gasoline, tobacco, and telephone services.

• When wealthy people die, the federal government collects estate taxes on the wealth passes on to their heirs.

Progressive Tax• The tax rate increases as income

increases.

• The higher the income. The larger the percentage of income is paid as taxes.

Regressive Tax

• The percentage you pay goes down as you make more money.

Proportional Tax

• Takes the same percentage of income from everyone, regardless of how much he or she earns.

• Ex: Tax rate of 10% on all incomes.

Federal Expenditures

1. Social Security-Large elderly population

3. Income Security-Retirement benefits for retired government

workers.

Defense• National Defense is the second largest

federal expenditure.

• $ 0.17 cents for every federal dollar is spent on defense.

• In times of war defense spending increases.

How the Budget process has changed

• George Washington was able to put all figures for the national government expenditures on a single sheet of paper.

• Today the federal budget consists of more than 1,000 pages of small type.

Presidents Role

• The Budget and Accounting Act of 1921 changes the Presidents role.

• He must submit a budget to congress 15 days after congress convenes each January.

State and Local GovernmentsSection 2

State Government Revenues

• Intergovernmental Revenues= this revenue is money that one level of government receives from another level.– Most of this comes from the Federal

Government.– Used for welfare, highway construction,

hospitals, and other needs.

State government Revenues

• Sales Tax= is a general tax levied on consumer purchases of nearly all products.

• The tax is a percentage of the purchase price, which is added to the final price the consumer pays.

State Government revenues

• Income Tax

• Contributions—retirement plans– Invested until it is needed to pay retirement

benefits.

Local Government Revenues

• Property Taxes= Taxes people pay on land and houses they own.– Real Property—lands and buildings– Personal property—portable objects or things

that can be moved.

Local Government Revenue

• Revenue from water and utility systems, sales taxes, local income taxes, and fines and fees.

State Government Expenditures

• Entitlement Programs—health, nutritional, or income payments to people who meet established eligibility requirements.

• States subsidize, or pay part of the cost of, their citizens college education.

• Maintain state highways

Local Government Expenditures

• Education– Public Schools and teachers

• Police and Fire Protection

• Water supply

• Sewage and Sanitation

Managing the EconomySection 3

Surplus and Deficits

• Surplus= when a government spends less than it collects.

• Deficit= when a government spend more than it collects in revenues.

From Deficit to the Debt

• When the Federal government runs a deficit, it must borrow money so it can pay its bills.

• Sells bonds=a contract to repay the borrowed money with interest at a specific time in the future.

Debt• All the money that has been borrowed

over the years and has not yet been paid back is the government’s debt or the national debt.

• In October 2006 the national debt was $4.9 Trillion– $16,365 for every person in America.

A Balanced Budget

• Expenditures = Revenues

• The Federal government is not required to have a balanced budget but many states are.

Impact of the National Debt

• The national debts most direct impact on the federal government is the amount of tax money needed each year to finance past borrowing.

• Every year the interest on the national debt must be paid.

• The larger the debt, the more taxes needed to pay this interest.

Interest Rate

• When the federal government borrows money, it leaves less for citizens and private businesses to borrow.

• As government borrowing increases, the interest rate rises.

Fiscal Policy

• Many people want lower taxes regardless of the state of the economy.

• Many people also want government services.

• So the Federal government has a hard time cutting spending even when the economy is strong.

Automatic Stabilizers

• Programs that begin working to stimulate the economy as soon as they are needed.

• The main advantage of automatic stabilizers is that these programs are already in place and do not need further government action to begin.

Examples of Automatic stabilizers

• Income Tax– Progressive tax

• Unemployment Benefits– Help give people money until they can find a

job