The Federal BudgetThe Federal Budget

• BudgetBudget is a policy document allocating is a policy document allocating burdens (taxes) and benefits burdens (taxes) and benefits (expenditures).(expenditures).

• Government collects $$$ by taxes and Government collects $$$ by taxes and spends it via expenditures. spends it via expenditures.

• If tax allocations are higher…it’s a If tax allocations are higher…it’s a surplussurplus (it did happen in ’99!) (it did happen in ’99!)

• If expenses are higher. . .it’s a If expenses are higher. . .it’s a deficitdeficit which is then added to the which is then added to the national debt national debt and you get a shortfall in the trillions …and you get a shortfall in the trillions …and it takes far too much of the current and it takes far too much of the current budget just to pay interest on the debt!budget just to pay interest on the debt!

GOVERNMENT’S SOURCES OF GOVERNMENT’S SOURCES OF REVENUEREVENUE

• THREE THREE MAJOR MAJOR SOURCES:SOURCES:

1.1. Personal & Personal & corporate corporate income taxincome tax

2.2. Social Social insurance insurance taxestaxes

3.3. Borrowing Borrowing (Bonds)(Bonds)

INCOME INCOME TAXESTAXES

• 1616THTH AMENDMENT AMENDMENT – 1913, explicitly – 1913, explicitly permitted Congress to collect income permitted Congress to collect income taxtax

• A PROGRESSIVE TAX - A PROGRESSIVE TAX - meaning?meaning?• Largest source of federal revenueLargest source of federal revenue

Married Taxpayers Filing Jointly

Individual Taxpayers

SOCIAL INSURANCE SOCIAL INSURANCE TAXESTAXES

• Paid by both Employers and EmployeesPaid by both Employers and Employees– For example: social security – each pays in 4.2% nowFor example: social security – each pays in 4.2% now– Social Security fastest growing source of government Social Security fastest growing source of government

incomeincome• Do NOT go into the general budget fund but, instead, Do NOT go into the general budget fund but, instead,

are earmarked for social security payments – they are an are earmarked for social security payments – they are an uncontrollable expenditureuncontrollable expenditure

• Done through BONDS• Treasury Dept. sells bonds, guaranteeing

to pay interest to bondholder.• Citizens, corporations, mutual funds, etc.

purchase bonds• Federal government has NEVER defaulted

on its bonds.• DEBT – all of the $ borrowed over the

years & still outstanding… now at over $17 trillion

Regan’s Regan’s Description of a Description of a Trillion Dollars:Trillion Dollars:

• In a speech to Congress in February 1981:• “A few weeks ago I called such a figure, a

trillion dollars, incomprehensible, and I’ve been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high.”

FEDERAL FEDERAL EXPENDITURESEXPENDITURES

• Primary Federal Expenditures:Primary Federal Expenditures:– Social Service State (social security,Social Service State (social security, Medicare, etc.)Medicare, etc.)– Interest on the national debtInterest on the national debt– National DefenseNational Defense

• Military used to be largest part of expenditures – Military used to be largest part of expenditures – permanent military & expensive technology in permanent military & expensive technology in Cold War Cold War years; years; remains high in “war on terror” yearsremains high in “war on terror” years

• BUT, biggest slice of budget goes to BUT, biggest slice of budget goes to UNCONTROLLABLE UNCONTROLLABLE EXPENDITURESEXPENDITURES – –ENTITLEMENT programsENTITLEMENT programs – if you – if you qualify, you get them, no matter what the cost to the qualify, you get them, no matter what the cost to the governmentgovernment– Social Security Act 1935Social Security Act 1935– MedicareMedicare 1965 – hospitals/doctors for elderly (prescriptions 1965 – hospitals/doctors for elderly (prescriptions

added 2003)added 2003)– MedicaidMedicaid also added in 60s -- aid to the poor/needy also added in 60s -- aid to the poor/needy

The Budgetary ProcessThe Budgetary Process• POWER OF THE PURSEPOWER OF THE PURSE belongs to Congress! belongs to Congress!• Nixon established Nixon established OFFICE OF MANAGEMENT AND OFFICE OF MANAGEMENT AND

BUDGET (OMB) -1970sBUDGET (OMB) -1970s– P’s Budgetary ArmP’s Budgetary Arm– Supervises preparation of the federal budget; Supervises preparation of the federal budget;

advises the Padvises the P• The basic process:The basic process:

1.1.P sends the budget recommended by OMB to P sends the budget recommended by OMB to Congress in JanuaryCongress in January

2.2. Then, 2-step process begins in Congress:Then, 2-step process begins in Congress:• Authorization Authorization – Congress authorizes/changes a program – Congress authorizes/changes a program

& sets a spending limit on it – what they & sets a spending limit on it – what they might might getget• Appropriations Appropriations – Congress sets final – Congress sets final fundingfunding of the of the

programs set by the authorization bill; can’t go higher, programs set by the authorization bill; can’t go higher, but can give lower amounts.but can give lower amounts.

– Congress hammers it out for months; sends to P Congress hammers it out for months; sends to P by Sept. for signature & to be ready for new by Sept. for signature & to be ready for new fiscal year that starts Oct. 1fiscal year that starts Oct. 1