Chapter 10
Government Spending
Perspective
Total Public
spending is about 1/3 of total economy
Public spending is growing in federal,
state, and local levels
Types of Spending
Goods and Services (roads and
licensing)
Transfer payments (redistribution of
wealth)
Grant-in-aid
(intergovernmental spending)
The "Economics" of Government Spending
Resource Allocation (TINSTAAFL)
Redistribution of Wealth
Competition with private sector
(crowding out)
Federal Budget
Executive formulation (proposal due by Feb)
Action by House (appropriations bills)
Action by Senate (resolve differences
in committee)
Signature by President (by Oct 1)
Federal Spending
Mandatory
(2/3rd of total; no annual approval)
Discretionary (1/3rd of total; annual
approval needed)
Spending Categories
Social Security (21%)
National Defense (19%)
Medicare (14%)
Income Security (13%)
Health
(9%)
Interest on Debt (9%)
State Spending
Balance Budget requirements (includes
Intergovernmental Expenditures
Welfare
Unemployment
compensation and retirement
Higher Education
Highway construction and roads
Local Spending
Elementary and Secondary Education
Public Utilities
Police and Fire protection
National Debt
Deficit Spending and the National Debt
Treasury bonds
Current Debt = $9.5 trillion
Trust Funds = $4.2 trillion
Net Debt = $5.3 trillion
As Percent of GDP = 41%
Per
capita debt = $17,600
Impact of Debt
Transfer of wealth (redistribute
incomes)
Less disposable income
Work incentives distorted
Inefficiency
Crowding-out effect
Efforts to Control Deficits
“pay-as-you-go”
programs
Line Item
Veto
Spending Caps
Entitlements
Summary: Efforts to control deficits are largely
ineffective.
Much of
spending is on entitlements that are mandatory.
In poor economic times, revenue declines
and entitlements rise.
Best
solution to budget deficits: economic growth.