Chapter 16a- The Federal Budget:

                                (1). Examine the Federal Budget, deficit spending, and the national debt.

        (2). Discuss the historic impact of deficits & budget surplus on the national debt.

        (3). Outline how the government obtains revenue from an historical perspective.

(4). Contrast various Federal taxes levied, including: progressive & regressive taxes.

(5). Examine how government spends its revenue and the changing nature of spending.

(6). Discuss the growth of entitlement programs and various attempts to limit them.

(7). Explain why "pork barrel" spending persists regardless of the vocal criticism.

 

v   Policymaking system => the Big Picture (Slide)

v   Budgets, Deficit Spending, and the National Debt

Ø    16-1a  The Growing Federal Budget:

§       Washington’s Budget=> $3-5M per year

§       Post Civil War costs=> $1B+ then down again

§       WWI=> back up to $1B

§       1962=> $100B

§       1997=> $1 Trillion

§       2001=> $1.8 Trillion

§       2003=> $2.3 Trillion

§        2005=> $2.5 Trillion and growing   

Ø    16-1b  The Rise and Fall of Deficit Spending:

§       19th Century=> Balanced Budget (with few exceptions)

§       Budget Deficits => (Figure 16-1)

·       1930s => FDR’s New Deal (slide)

·       1940s => WWII

·       1960s => LBJ’s War on Poverty & Vietnam War

·       1980s => Reagan Tax cuts & rise of Defense spending

·       1990s => Clinton Tax increase & Economic growth

·       2003 => Bush Tax cut, Econ downturn, 9/11, Iraq War, Katrina     

 

Ø    16-1c  The National Debt (Figure 16-2):

§       Contrast Debt versus Deficit (how related?)

Ø    16-1d  The Consequences of a Large National Debt:

§       Is debt always bad? (investment vs. consumption)

§       When Government barrows $$$ => from whom?

·       Interest payments => The trade offs

¨     Lost opportunities (discretionary spending)

¨     Impact on interest rates?

¨     Impact on private sector growth?

¨     Impact on jobs? => consumer spending?

¨     Impact on economic growth=> National economy?

v   Where Does Government Revenue Come From?

Ø    16-2a  Government Revenue in Historical Perspective:

§       Changes over time => Figure 16-3 & slide

§       Social Security Act of 1935 (FICA)

·       Growth in revenue share over time (Figure 16-3b & c))

Ø    16-2b  Income and Payroll Taxes:

§       Contrast the different types of taxes:

·       Progressive tax (example – why?)

·       Regressive tax (example – why?)

§       Various views & comparison of tax burdens:

·       US vs. Other democracies (Figure 16-4 & slides)

v   Where Does Government Spending Go?

Ø    16-3a  The Changing Nature of Government Spending:

§       Changes over time (Figures 16-5 & 16-6)

§       Shift from Cold War Defense to Human Resources

Ø    16-3b  The Growth of Entitlement Programs:

§       Entitlement programs – who qualifies?

·       Social Security =>

¨     Pay as you go system => Federal Pyramid scheme?

¨     1950: (15 to 1)=>  1990: (5 to 1)=> trend & impact?

¨     COLA & the CPI (Box 16-1 & slide)=> impact?

¨     Proposed adjustments? (taxes, benefits, eligibility)

Ø    Making hard choices=> The 3rd Rail &who votes?

·         Other Entitlement Programs

¨     Medicare (XXM elders?)=> $XXB?

¨     Medicaid (XXM poor?) & Food Stamps (XXM poor)

¨     Federal retirement & VA disability benefits

Ø    16-3c  Limiting Entitlement Programs:

§       Long term budget problems (the Baby Boomers)

§       Growth & impact of entitlement programs (Figure 16-7)

·       Discretionary vs. non-discretionary spending

§       Cutting costs: Political will vs. political costs

Ø    16-3d Pork barrel politics & improving reelection chances:

§       One man’s pork is another’s vital program (bill riders)

Chapter 16b-  The Federal Budget:

(8). Explain why Budget Deficits persist, and discuss the role of Congress, the President, and the Public in contributing to this problem.

(9). Examine how our Budgetary Process has evolved and discuss key reform efforts.

                            (10). Explain how the Federal Budget Cycle works and the significance of appropriations.  

                            (11). Discuss the brief period of budget surpluses and reason for the return of deficits.

                            (12). Evaluate the Budget Process and explain the dominant role of politics affecting it.

v   Who is Responsible for the Budget?

Ø    16-4a  Congress and the President

§       Role in perpetuating budget deficits=>

§       Decisions on programs, spending levels, & taxes

·       Congressional appropriations & Presidential veto

Ø    16-4b  The American Public

§       Responding to the wishes of the voters

§       Balancing the budges vs. preserving key programs

·       Top tax breaks favored by public (Figure 16-8)

v   The Budgetary Process - Historic overview

Ø    16-5a  The Budgetary Process from Washington to  Nixon:

§       Budget & Accounting Act of 1921 => power of President

§       Office of Management & Budget (OMB) – 1970

§       Little change: President proposes & Congress disposes

Ø    16-5b  Budgetary Reform in the 1970s:

§       Nixon’s impoundments & growing deficits

§       Congressional Budget & Impoundment Act of 1974

§       Congressional Budget Office (CBO) vs. OMB

§       The Budget Cycle (Figure 16-9 & slide)

§       Divided government  & conflicting budget priorities

·       Continuing resolutions

§       Changing the rules fails to overcome basic disagreement

 

Ø    16-5c  Budgetary Reform in the 1980s

§       Gramm-Rudman Reform attempts at fiscal discipline

·       Goal: Reduce deficits (result?)

·       Disagreement of budget priorities trump reforms

·       Lack of consensus & political will 

Ø    16-5d  Deficits to Surpluses & Back Again:

§       Serious attempts to reduce deficit spending (Table 16-1)

·       Budget Enforcement Act (BEA) of 1990

¨     Set limits on spending growth & imposed sanctions

Ø    Defense, domestic policy, & international affairs

·       Clinton Budget for 1993 (some cuts & higher taxes)

¨     Deficits begin to gradually fall

·       Budget Deal of 1997 (Clinton & GOP Congress)

¨     Aim: balance budget by 2002 & Contract w/America

¨     Reality: Presidents have a vote too (veto)

¨     Compromise: major cuts in Federal programs

Ø    Surplus first appears in 1998 (1st since 1969)

§       Combined effects of all of above? (Table 16-1)

·       Is the author right about the cause of surpluses?   

 

Ø    16-5e  Surpluses Until the Bubble Burst

§       Deficit spending has returned – why?

·       Combination of several factors:

¨     2000=> Tech Bubble burst => $$$ recession

Ø    Stock Market freefalls (NASDQ down 60%)

Ø    Corporations cut spending & Job losses grow

¨     9/11/2001 => another major shock to economy

Ø    people sell more stocks, stop flying=> airlines fall

¨     War on Terror (Afghanistan) => increased defense $

¨      Bush budget (initially: where to spend surplus)

Ø    Tax cut (now substantially reduced by Congress)

Ø    Increased spending on Defense & Homeland Def.

¨     War with Iraq=>

Ø    Initial cost estimates ($95B & growing)

Ø    Cost of peace unknown (could be $400B)

Ø    Uncertainty of outcome (now apparently OBE)

Ø    Stock market impact & link to economic growth

¨     Katrina & other natural disasters


Ø    16-5f  More Budget Reforms?

§       Line-Item Veto (OBE) => unconstitutional

§       Balanced Budget Amendment (unlikely to pass)

§       Flat tax (pros & cons?) => also OBE – why?

·       Loss of momentum & Bush’s Budget tax cuts  

§       Any tax reform must by revenue neutral – why?

 

v   Is the Budget Process Irrational?

Ø    Role of past Budgets=> tinkering at the margins

§       Incremental Budgeting=> autopilot budgeting

§       Zero based budgeting=> too hard & disruptive

Ø    Mechanical systems of reform

§       Budget cycle (“The POM) => fiscal discipline?

Ø     Political Realities (The dirty little secret):

§       Political priorities determine budget fiscal priorities

§       Politicians respond to conflicting Public demands

§       Whatever is most likely to get them reelected   

G-16 KEY TERMS

 

Balanced budget:  A budget in which spending and revenues are equal.

 

Budget and Accounting Act of 1921:  An act of Congress that created the Bureau of the Budget and allowed the president to review and coordinate the spending proposals of federal agencies and departments.

 

Budget deficit:  The amount by which government spending exceeds government revenues in a single year.

 

Budget surplus:  The amount by which government revenues exceed government spending in a single year.

 

Congressional Budget and Impoundment Control Act of 1974: An act of Congress that created the new budget process and the Congressional Budget Office and curtailed the president’s power to impound funds.

 

Congressional Budget Office (CBO):  A nonpartisan congressional agency in charge of assisting Congress in reviewing and coordinating budget requests to Congress.

 

Continuing resolutions:  Temporary laws Congress passes to keep the government running when Congress misses the deadline for passing the budget.

 

Corporate welfare:  Government subsidies or tax breaks of questionable value to private corporations.

 

Cost-of-living adjustment (COLA):  An increase in Social Security or other benefits designed to keep pace with inflation.

 

Discretionary spending:  Federal spending on programs that can be controlled through the regular budget process.

 

Entitlement programs:  Programs, created by legislation, that require the government to pay a benefit directly to any individual who meets the eligibility requirements the law establishes.

 

 

 

Flat tax:  Any income tax system in which taxable income is taxed at the same percentage rate, regardless of the taxpayer’s income.

 

Line-item veto:  The ability of the executive to delete or veto some provisions of a bill to become law.

 

National debt:  The total amount of money the federal government owes to pay for accumulated deficits.

 

Non-discretionary spending:  Federal spending on programs such as Social Security that cannot be controlled through the regular budget process.

 

Office of Management and Budget (OMB):  The agency in charge of assisting the president in reviewing and coordinating budget requests to Congress from federal agencies and departments.  Formerly the Bureau of the Budget.

 

Pork barrel:  Legislation that appropriates government money for local projects of questionable value that may ingratiate a legislator with his or her constituents.

 

Progressive tax:  A tax system in which those with high incomes pay a higher percentage of their income in taxes than those with low incomes.

 

Regressive tax:  A tax system in which those with high incomes pay a lower percentage of their income in taxes than those with low incomes.

 

Revenue neutral:  The quality of any tax reform plan that will neither increase nor decrease government revenues.

 

Social Security Act of 1935:  The act of Congress that created the Social Security tax (Federal Insurance Contribution Act—FICA) and Social Security programs.