Government Revenue, Expenditures, and Fiscal Policy Study Guide

Federal Government Spending Categories

• The federal government's expenditures are divided into three primary categories: mandatory spending, discretionary spending, and interest on the national debt.

• Mandatory Spending:

  • Definition: This includes all payments to individuals, businesses, and other governments that are required by law and do not go through the annual appropriations legislation process.

  • Fiscal Year 2020 Statistics: Mandatory spending was set at $2.841\,\text{trillion}$, comprising approximately $59.86\,\%$ (nearly $60\,\%$) of the total federal budget.

  • Major Components: Includes entitlement programs such as Social Security, Medicare, and Medicaid, as well as funding for state and local governments.

  • Trends: Spending on major health programs as a percentage of Gross Domestic Product (GDP) increased from $3.5\,\%$ in $1998$ to $5.7\,\%$ in $2018$.

• Discretionary Spending:

  • Definition: Optional spending that stems from annual appropriations bills set by the House and Senate Appropriations Committees. Congress establishes funding levels for these items each fiscal year.

  • Fiscal Year 2020 Statistics: Discretionary programs represented $1.426\,\text{trillion}$, or about $30.05\,\%$ of the federal budget.

  • Defense Allotment: Within the $2020$ discretionary budget, $726\,\text{billion}$ was allocated specifically to military and defense.

  • Major Components: Funding for the direct activities of the federal government, including:

    • Military and defense.

    • Federal Bureau of Investigations (FBI).

    • Education and transportation.

    • Veterans’ benefits.

• Interest on the National Debt:

  • Definition: The amount the federal government must pay on its outstanding debt each fiscal year.

  • Debt Holders: The debt is owed to foreign governments, businesses, and individuals.

  • Securities: Debt is held in the form of treasury bills, treasury notes, treasury bonds, savings bonds, and other securities.

  • Fiscal Year 2020 Statistics: Interest payments were estimated at $479\,\text{billion}$, representing approximately $10.24\,\%$ of the federal budget.

  • Future Projections: Interest is expected to be one of the fastest-growing expenditures, estimated to reach $823\,\text{billion}$ in fiscal year $2029$. The cost varies based on the interest rate and the total amount financed.

Entitlement Programs and Social Safety Nets

• Entitlement Definition: A program or provision where recipients are provided eligible benefits based on specific legislation.

• Examples of U.S. Entitlements:

  • Social Security Retirement Benefits.

  • Medicare and Medicaid.

  • Unemployment compensation.

  • Temporary Assistance for Needy Families (TANF).

  • Supplemental Nutrition Assistance Programs (SNAP).

  • Child’s Health Insurance Program (CHIP).

  • Housing assistance (including Section 8).

  • Earned income tax credit.

  • Student loans and Veterans’ compensation.

  • Government employee pensions.

  • Deposit insurance (e.g., FDIC).

• Social Security Retirement Benefits: A federal program providing monthly payments to individuals at least $62$ years of age who have paid into the system for $10$ years or more.

• Medicaid: A government program providing health coverage based on financial need, regardless of age. It is funded jointly by state and federal governments but administered by the states.

• Medicare: A federal health-care insurance program for people $65$ years or older and individuals under $65$ with certain disabilities.

State and Local Government Spending Patterns

• Federal Grants to States: State and local governments receive significant revenue from the federal government. In $2017$, states received $619.976\,\text{billion}$ in federal grants ($31.3\,\%$ of all state spending). Of this, $474\,\text{billion}$ came from mandatory grants.

• Functional Categories of Expenditure (FY 2016):

  • Public Welfare: $22\,\%$ of total spending.

  • Elementary and Secondary Education: $21\,\%$ of total spending.

  • Higher Education: $10\,\%$ of total spending.

  • Health and Hospitals: $10\,\%$ of total spending.

  • Police and Corrections: $6\,\%$ of total spending.

  • Highways and Roads: $6\,\%$ of total spending.

• State vs. Local Government Distinctions:

  • State governments prioritize welfare programs ($42\,\%$ of state budget vs. $4\,\%$ of local) and higher education ($18\,\%$ of state budget vs. $3\,\%$ of local).

  • Local governments prioritize K-12 education ($40\,\%$ of local budget vs. $0.5\,\%$ of state).

  • Medicaid alone accounted for nearly $30\,\%$ of all state spending in Fiscal Year $2018$.

• State Case Studies (FY 2020 Estimates):

  • Delaware: Education ($34\,\%$), Health Care ($22\,\%$), Transportation ($11\,\%$), Other ($9\,\%$), Protection ($7\,\%$), Pensions ($6\,\%$), General Government ($5\,\%$), Welfare ($4\,\%$), Interest ($2\,\%$).

  • Washington: Education ($27\,\%$), Health Care ($25\,\%$), Other ($16\,\%$), Transportation ($9\,\%$), Pensions ($7\,\%$), Protection ($6\,\%$), Welfare ($4\,\%$), Interest ($3\,\%$), General Government ($3\,\%$), Defense ($0\,\%$).

• Long-term Spending Trends:

  • State spending increased from $1.76\,\text{trillion}$ in $2017$ to a projected $1.91\,\text{trillion}$ in $2019$.

  • As a percentage of GDP, state spending has remained stable around $9\,\%$ between $2012$ and $2019$.

Fiscal Policy and the Macroeconomy

• Definition: Fiscal policy is the implementation of government spending and tax policies to influence macroeconomic conditions, including inflation, employment, and economic growth.

• Keynesian Influence: The economist John Maynard Keynes contended that fiscal policy could stabilize the business cycle. He argued that government spending drives aggregate demand and is necessary to reach full employment.

• Expansionary Fiscal Policy:

  • Goal: Curtail or stop a recession and stimulate the economy.

  • Actions: Decrease individual or corporate tax rates (tax cuts) and/or increase government spending (subsidies, transfer payments, infrastructure).

  • Economic Effects: Increases Real GDP, increases overall price levels (inflation), and increases employment. Shifting the aggregate demand curve to the right (from $AD_2$ to $AD$).

  • Historical Examples:

    • Franklin Roosevelt’s New Deal: Created jobs via public works (e.g., Tennessee Valley Authority). Economy grew by $10.8\,\%$ in $1934$, $8.9\,\%$ in $1935$, and $12.9\,\%$ in $1936$.

    • John F. Kennedy administration: Used during the $1960$ recession.

    • George W. Bush: Tax cuts to combat the $2000$-$2001$ recession.

    • Barack Obama: Economic Stimulus Act of $2009$; tax cuts and boosted unemployment benefits for the Great Recession.

• Contractionary Fiscal Policy:

  • Goal: Slow growth to a healthy level (typically $2\,\%$ to $3\,\%$ GDP growth) and reduce inflation.

  • Actions: Increase taxes and/or decrease government spending (cutting subsidies, infrastructure contracts, or government personnel).

  • Economic Effects: Decreases Real GDP, decreases price levels, and decreases employment. Shifting the aggregate demand curve to the left.

  • Historical Examples:

    • Franklin Roosevelt (1937): Cut New Deal spending to balance the budget, causing the economy to decrease by $3.3\,\%$ in $1938$.

    • Bill Clinton: Increased the top income tax rate from $28\,\%$ to $39.6\,\%$.

Comprehensive Federal Revenue and Expense Data (FY 2019)

• Revenue Breakdown (Total $3.462\,\text{trillion}$):

  • Individual Income Taxes: $1.718\,\text{trillion}$ ($48.9\,\%$ to $49.6\,\%$).

  • Social Security and Medicare Taxes: $1.242\,\text{trillion}$ ($35.4\,\%$ to $35.9\,\%$).

  • Corporate Income Taxes: $230.2\,\text{billion}$ ($6.6\,\%$).

  • Excise Taxes: $98.9\,\text{billion}$ ($2.8\,\%$ to $2.9\,\%$).

  • Miscellaneous Revenue: $84.6\,\text{billion}$ ($2.4\,\%$).

  • Customs Duties: $70.8\,\text{billion}$ ($2.0\,\%$).

  • Unemployment Insurance: $40.9\,\text{billion}$ ($1.2\,\%$).

  • Estate and Gift Taxes: $16.7\,\text{billion}$ ($0.4\,\%$ to $0.5\,\%$).

  • Other Retirement Revenue: $10.3\,\text{billion}$ ($0.3\,\%$).

• Expense Breakdown (Total $4.447\,\text{trillion}$):

  • Health Care (Medicare, Medicaid, Hospitals): $1.236\,\text{trillion}$ ($27.79\,\%$).

  • Pensions (Disability, Retirement): $1.105\,\text{trillion}$ ($24.85\,\%$).

  • National Defense and Veteran Services: $890.1\,\text{billion}$ ($20.02\,\%$).

  • Interest on National Debt: $375.6\,\text{billion}$ ($8.45\,\%$).

  • Welfare: $365.9\,\text{billion}$ ($8.23\,\%$).

  • Education: $148\,\text{billion}$ ($3.33\,\%$).

  • Other Spending: $143.5\,\text{billion}$ ($3.23\,\%$).

  • Transportation: $96.2\,\text{billion}$ ($2.16\,\%$).

  • General Government: $48.3\,\text{billion}$ ($1.09\,\%$).

  • Protection (Police, Fire, Safety): $38.3\,\text{billion}$ ($0.86\,\%$).

• Fiscal Deficit: The federal government ran a deficit of $984.4\,\text{billion}$ in Fiscal Year $2019$, which was added to the national debt.

The Case for Taxation

• Historical Context: The first federal income tax was levied by Abraham Lincoln.

• Civic Duty: Paying taxes is described as a necessary civic duty. Revenue pays for essential services that maintain the welfare of the nation.

• Metaphor: Taxes are equated to "rent" people pay to live in the country and receive government services.

• Services Funded: Includes education, economic programs, national debt interest, healthcare, research, transportation, and defense.