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Government Spending in Perspective
• Per Capita – per person– in 2003, the U.S. per capita expenditures
was $10,300
• Public Sector – the part of the economy made up of federal, state, and local governments
Reasons for Expanding the Public Sector by 1940
1. Expenses of WWII
2. Change in public opinion – they felt government should play a larger role in everyday economic affairs
3. Success of large-scale public works projects ( roads, social security )
• Over time, people started to question how much the government should become involved
• Private Sector – the part of the economy made up of private individuals and privately-owned businesses
Two Kinds of Spending
1. Goods and services – tanks, planes, land, schools
2. Transfer Payments – a payment for which the government receives neither goods nor services in return
• Social security, welfare
• Every year the government creates a federal budget – an annual plan for
the revenues and expenditures
• The federal budget is for a fiscal year – a 12 month planning period
(Oct. 1 – Sept. 30)
Steps to Make a Federal Budget
1. President creates budget guidelines
• Federal Budget Deficit – excess of expenditures over revenue (spending
more than taken in with taxes)
2. Approval by the House
3. Approval by the Senate
Major Government Spending
• Social Security• National Defense• Medicare – government healthcare for
senior citizens • Medicaid – government healthcare for
low income individuals
• States must get approval before spending revenue dollars
• Balanced Budget Amendment – requires annual spending to not exceed revenues brought in– States cut spending
when revenues drop; unlike federal government
State ExpendituresMajor types of state expenditures:
• Intergovernmental expenditures• Higher education• Public welfare
Local Government Expenditures
Local governments have a
responsibility for: – elementary and
secondary education
– police forces– highways
The National Debt• Deficit spending – spending in excess
of revenues collected (spending more than tax money coming in)
Deficits Add to the Debt
• When the federal government runs a deficit, it makes up for the shortage of money by borrowing from others
• Federal Debt – the total amount borrowed from investors to finance the government’s deficit spending
National Debt
• Some of the debt is money the government owes to itself
• Trust Funds – special accounts used to fund specific types of expenditures
• Social Security and Medicare
Public Vs. Private Debt• The difference…
–When private citizens borrow money they make plans to repay by a specific date, and have a debt collector to answer to
– The government does not have a specific date to pay things off, or anyone else to answer to
Impact of the National Debt
• Affects the distribution of income within the economy
• Causes a transfer of power from the private to public sector
• High taxes needed to pay off the debt can reduce the incentives to work, save, and invest