Unit 7 Macroeconomics:Taxes, Fiscal, and Monetary Policies

Chapters 14.3

EconomicsMr. Biggs

Federal Spending

When the federal government receives its tax revenue of approximately $2.16 trillion, most of it is already accounted for.After the government fulfills all its legal obligations, only about 39% of the money remains to be used at the government’s discretion.

Mandatory and Discretionary SpendingMandatory spending - Spending on certain programs that is mandated, or required, by existing law.For example, Social Security, Medicare, and interest on the national debt.The government has a limited control over its spending because it cannot control how many people will qualify for benefits.Discretionary spending - Spending category about which government planners can make choices.For example, defense and education.

Entitlement Programs Entitlement - A social welfare program that people are “entitled to” if they meet certain eligibility requirements. A “means tested” program means that people with higher incomes receive fewer or no benefits.For example, Medicaid is means tested and Social Security is not.

Social SecuritySocial security is the largest category of federal mandatory spending with over 45 million people receiving entitled benefits.

MedicareMedicare pays for hospital care and for the costs of physicians and medical services for people over 65 years old.

MedicaidMedicaid - Entitlement program that benefits low-income families, some people withdisabilities, and elderly people in nursing homes.

Other Mandatory Spending ProgramsOther means-tested entitlements benefit people whose income fall below a certain level.For example, food stamps.

The Future of Entitlement SpendingEntitlement spending will increase enormously when the “baby boomers” (b. 1945 to 1964) reach age 65.In 1995, there were four people paying taxes for each recipient.In 2050, it is predicted that there will be two people paying taxes for each recipient.

Discretionary SpendingSpending on defense accounts for 58% of the federal government’s discretionary spending.The remaining funds are divided among other programs.

Defense SpendingDefense spending consumes about 22% of the total federal budget.It pays for the salaries of military men and equipment such as tanks and ships.

Other Discretionary Spending Other discretionary spending includes all government salaries, research, law enforcement, education, housing, foreign aid, etc.It is a relatively small part of the federal budget.

Federal Aid to State and Local GovernmentsState and local governments share the cost of some programs with the federal government. For example, helping children, education, lower-income housing, mass-transit, health care (Medicaid), highway construction, employment training, and dozens of other programs.

The End