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  1. Government and the Federal Budget

  2. Historical Budget Process • 1789-1921: Congressional Control on the budget • Mostly a balanced budget timeperiod; only time the U.S. had a federal deficit was during wartime • In times of war, the government raised taxes and borrowed money to finance the war; when it ended, Congress worked to pay off the national debt as quickly as possible

  3. Historical Budget Process • 1921-1974: Presidential Dominance of Budget-Making: • Using the Office of Management and Budget (OMB) the President is required to submit a proposed budget to Congress each year • Result has been more years of deficit spending, and high national debt

  4. Historical Budget Process • 1974 – Present: Shared Control of the Budget • After Nixon used impoundment overextensively, Congress rewrote the budget process • Budget and Impoundment Control Act of 1974 strengthened Congress’ role in budget process; • Created budget committees in both the House and Senate • Created the Congressional Budget Office (CBO) to created their own information and data on budgets

  5. The President and the Budget • The President’s Budget • Presidents did not originally play a role in the budget. • Now budget requests are directed through the OMB and president before going to Congress. • The budget process is time consuming, starting nearly a year in advance. • Negotiations occur between OMB, the president and the agencies about their requests.

  6. Congress and the Budget • Congressional Budget and Impoundment Control Act of 1974 did much to reform the process. • Budget should be considered as a whole. • A budget resolution sets the bottom line for the budget. • The current budget is then reconciled (adjusted to meet the resolution). • The new budget is authorized and appropriated.

  7. Congress and the Budget • The Success of the 1974 Reforms. • From 1974 to 1998, every budget was a deficit budget. • Congress misses most of its own deadlines. • Congress passes continuing resolutions to keep the government going until it passes a new budget. • Omnibus budget bills often contain policies that can’t pass on their own.

  8. Where does the money come from? (Input factors) • Individual Income tax – 39% • Social Insurance tax – 32% • Corporate Income tax – 13% • Borrowing, excise taxes, other – 16%

  9. Types of Taxes • Progressive Tax: the more you make the higher percentage you pay (Federal taxes); bulk of burden on the wealthy • Proportional Tax: everyone pays the same rate or percentage (state income tax) • Regressive Tax: The % of income spent on these taxes is greater for the poor than the wealthy (sales tax)

  10. Output: Government ExpendituresMandatory v. Discretionary Spending • Fiscal Year: October 1st to September 30th • Mandatory Spending: Spending that is fixed by the law; interest on national debts and Entitlements (also known as uncontrollable spending because they are services guaranteed to the # of people, not a fixed amount) such as Social Security, Medicare and Welfare • Discretionary Spending: expenditures that can be raised or lowered as Congress and the Pres. see fit (biggest item includes defense)

  11. Federal Expenditures • The Rise of the Social Service State • The biggest part of federal spending is now for income security programs. • The biggest of these is Social Security. • Social Security has been expanded since 1935 to include disability benefits and Medicare. • Social security and Medicare face financial problems with more recipients living longer.

  12. Federal Expenditures • “Uncontrollable” Expenditures • Spending determined by the number of recipients, not a fixed dollar figure. • These are Mainly entitlement programs where the government pays known benefits to an uncontrollable number of recipients, like Social Security. • The way to control the expenditures is to change the rules of who can receive them. • Mandatory spending is spending on programs required by current law.

  13. Result • Budget Surplus: When input (revenue) exceed output (expenditures) • Balanced Budget: When input (revenue) equals output (expenditures) • Budget Deficit: When input (revenue) is less than output (expenditures) • To make up the deficit, government borrows money by issuing the sale of government bonds; still adds to the National Debt (total amt. owed by a nation’s government as a result of borrowing • U.S. debt Clock