NAME DATE CLASS. Financing the Government Lesson 1: The Federal Budget: Revenues and Expenditures

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1 NAME DATE CLASS Lesson 1: The Federal Budget: Revenues and Expenditures ESSENTIAL QUESTION How does government influence the economy and economic institutions? GUIDING QUESTIONS 1. How does the federal budget reflect choices? 2. How do state and local revenues and expenditures differ from those of the federal government? Terms to Know exceed to go beyond or become bigger than fiscal year any 12-month period chosen for keeping accounts transmit to send mandatory spending federal spending required by law that does not need approval from Congress each year discretionary spending federal spending that must be approved by Congress each year appropriations bill legislation that determines spending for specific programs for the coming year intergovernmental revenue money that one level of government receives from another level of government sales tax a tax paid by consumers when they buy a good or a service subsidize to aid or support with money entitlement program a government program that makes payments to certain people to help them meet their needs property tax a tax on the value of land and property owned by someone What Do You Know? In the first column, answer the questions based on what you know before you study. After this lesson, complete the last column. Now... Making Inferences 1. What can you do if your expenses are higher than income? How does the federal government pay for the services it provides? Later... Understanding th e Federal Budget A budget is a spending plan for the future. To make a personal budget, you figure out all of your income for a certain period. Then you figure out all of your expenses for the same period. If your expenses exceed, or are more than, your income, you need to find ways to spend less or to make more money. The federal government does basically the same thing. Each year it makes a budget for the coming fiscal (FIHS kuhl) year. A fiscal year is any 12-month period used for keeping accounts. The federal government s fiscal year begins on October 1 and ends on September

2 NAME DATE CLASS Lesson 1: The Federal Budget: Revenues and Expenditures, Continued The budget is named for the calendar year in which it ends. For example, the budget for fiscal year (FY) 2015 covers the period from October 1, 2014, to September 30, The president and Congress both work on the budget. The diagram below shows how they do this. First, the president transmits, or sends, a budget message to Congress. It states how much money the president wants to spend on every federal program. Glue Foldable here The Federal Budget Process Reading Check 2. How is making a federal budget similar to and different from making a personal budget? STEP 1 President sends Congress a budget message that: expenses; priorities; STEP 2 House and Senate pass budget resolutions that outline spending and taxes Caps on spending are set STEP 3 House and Senate pass bills authorizing spending, A committee reviews the president s message. Then it writes a plan called a budget resolution. The resolution sets limits on spending in certain areas. It says how much total revenue the government will collect. The budget resolution goes to the full House and Senate for approval. The federal budget has two different kinds of spending. Mandatory spending is spending that is set by law. It does not need to be approved each year. An example is Social Security. Discretionary (dis KREH shuh NEHR ee) spending is spending on budget choices that are made and approved each year. It can go up or down from year to year. An example is spending on defense. Congress passes a number of appropriations (uh PROH pree AY shuhnz) bills. These bills list how much the government will spend on specific programs. These bills start in the House and are then approved by the Senate. Spending cannot exceed the limits in the budget resolution. After each bill is passed by the House and Senate, it is sent to the president. The president can sign it into law or veto it. If the bill is vetoed, Congress has two choices. It can either rewrite the bill or override the veto. The finished federal budget has two parts revenues and expenditures. Revenue is the money a government collects to use for its spending. The biggest source of revenue is personal income tax. People pay this tax on the money they earn Place a two-tab Foldable along the dotted line to cover the text. Label the anchor tab Federal Budget. Label the two tabs Revenue and Expenditures. On both sides of the tabs, write facts about the federal budget as you read. Comparing 4. What is the difference between mandatory spending and discretionary spending?

3 NAME DATE CLASS Lesson 1: The Federal Budget: Revenues and Expenditures, Continued Identifying 5. Where does most federal revenue come from? What does the government spend the most money on? Visualizing 6. Study the graphs. What percentage of its budget did the federal government spend on Medicare? The following graphs show the federal budget for FY Most revenue comes from personal income taxes and payroll taxes. Defense and Social Security are the two biggest expenses. Note the category called interest on debt. This is the interest the government must pay on the money it has borrowed. 1.0% 11.6% 2.9% Receipts The Federal Budget, FY 2011* FY % 43.7% Receipts $2, % 19.6% 1.0% Expenditure $3, % Personal income tax Payroll tax Corporate income tax Excise tax 36.4% Estate tax Customs duties Other (Deficit) $1,267 (in billions of dollars) 10.5% Expenditures 13.0% 15.5% National defense Social security Income security Medicare 19.2% Health Interest on debt Other Contrasting 7. How is budgeting different for states than for the federal government? Identifying 8. What is intergovernmental revenue? Source: Economic Report of the President 2010; figures given are estimates for FY 2011 Budgeting for State and Local Governments State and local governments also make budgets. In almost all states, the law says that state and local governments cannot spend more money than they take in. They must balance their budgets and cannot borrow to make up for too little revenue. The graphs on the next page show state budgets for FY They show that state governments get most of their money from intergovernmental revenue. This is money that one level of government gets from another. The states get money from the federal government. Another large source of money for states is sales taxes. Consumers pay sales tax when they buy a product or service. Most states have sales taxes. Most also have a personal income tax. On the spending side, public welfare is the largest category. This refers to programs to help people with little money with basic health and living conditions. Most of this spending is on states' shares of funding for entitlement programs. These are called entitlements because the law sets the requirements, or rules, for the programs. An example is the Medicaid program. Medicaid helps people get health care. 275

4 NAME DATE CLASS Lesson 1: The Federal Budget: Revenues and Expenditures, Continued Education is also a large spending category. Some state education money goes to help local governments. Some is used to subsidize (SUHB suh DEYEZ) college for young people. To subsidize means to help pay for. State Government Revenue and Expenditures STATE GOVERNMENT REVENUE 26.6% 27.6% STATE GOVERNMENT EXPENSES 42.6% 13.4% 20.4% Reading Check 9. What is the biggest spending area for state governments? What is the largest local government expenditure? 3.4% 3.1% Intergovernmental revenue Sales and gross receipts Personal income tax 17.2% 22.1% Corporate income tax Retirement and unemployment insurance receipts Miscellaneous revenue 10.5% Education Public welfare Health and hospitals Highways 5.3% 5.2% 2.6% Interest on general debt Retirement and unemployment insurance Other Identifying 10. What services are provided by local governments? Like state governments, local governments rely on intergovernmental revenue. Local governments get money from state governments. This money is their largest source of revenue. They also collect property taxes to raise money. These are taxes on the value of the land and buildings people own. Property taxes are a large source of income for local governments. Some local governments have sales or income taxes too. Traffic fines and permit fees also bring in revenue for local governments. Local governments provide many of the services people depend on. This is where most local spending goes. Education is the largest portion of local spending. Other services include police and fire protection, libraries, water service, sewage, trash collection, and street repa ir. Check for Understanding What is the biggest source of revenue for local governments? For state governments? How do the federal government and state governments differ when it comes to balancing a budget? Glue Foldable here 11. Place a three-tab Foldable along the dotted line. Label the top tab Federal, the middle tab State, and the bottom tab Local. On the tabs, write how each level of government gets revenue

5 NAME DATE CLASS Lesson 2: Fiscal Policy ESSENTIAL QUESTION How does government influence the economy and economic institutions? GUIDING QUESTIONS 1. What do governments do when the budget does not balance? 2. How does the government try to influence the economy? Terms to Know balanced budget a budget in which expenditures and revenue are equal predict to say what will happen in the future budget surplus a situation in which a government collects more revenues than it spends budget deficit a situation in which a government spends more than it collects in revenues debt money borrowed and not yet paid back achieve to attain fiscal policy the government s use of spending and taxes to help the economy grow automatic stabilizer any economic feature that works to increase or preserve income without other government action What Do You Know? In the first column, answer the questions based on what you know before you study. After this lesson, complete the last column. Now... Describing 1. What are some reasons that it is difficult for governments to balance their budgets? How and why does the government try to fix an unbalanced budget? Later... Surpluses and Deficits Making a government budget is easier than following one. Budgets are made based on what officials predict, or think is going to happen in the future. Their predictions can be wrong. Unexpected events such as natural disasters can happen that cause spending to increase. Revenues can go down when the economy slows. Governments try to balance their budgets. A balanced budget is one in which revenue and spending in a year equal each other. When a government collects more money than it spends, it has a budget surplus. Governments often save budget surpluses to use as a reserve. This reserve is spent to balance the budget in years when revenues are low. 277

6 NAME DATE CLASS Lesson 2: Fiscal Policy, Continued When a government spends more money than it collects, it has a budget deficit. In all states except Vermont, the law says that the state must have a balanced budget. If spending exceeds revenues, the state cannot borrow money to make up the difference. It has to cut spending, raise taxes or both. The federal government does not face the same limits. It can and often does have a budget deficit. To make up the difference between what the government spends and what it collects, the federal government borrows money. It does this by selling bonds. A bond is a contract to repay the cost of the bond, plus interest, at a future date. Most government bonds are repaid in 10 to 30 years. A person who buys U.S. savings bonds is lending the government money. The government also sells Treasury bills. The government repays Treasury bills in one year or less. Borrowing to cover budget deficits puts the government in debt. Debt is money that has been borrowed and not yet paid back. Being in debt means owing money. For each year the federal government has a deficit, its total debt goes up. The line graph below shows that the federal government s debt has been growing for many years. Contrasting 2. How is a budget surplus different from a budget deficit? Analyzing Cause and Effect 3. Why does the federal debt continue to grow? IN BILLIONS OF DOLLARS United States Deficits and Surpluses Surplus Deficit YEARS The federal debt is expected to keep growing in the future. This growing debt has some negative effects: The interest on the debt is costly. Interest payments are a large part of the federal budget. As the debt grows, so does the interest. Reading Check 4. For the most part, has the federal government had a balanced budget, a surplus, or a deficit over the last two decades? Visualizing 5. When was the last time the United States had a surplus? 278

7 NAME DATE CLASS Lesson 2: Fiscal Policy, Continued Summarizing 6. What are some possible effects of the federal debt? Listing 7. What are the federal government s goals for the economy? Vocabulary 8. What is fiscal policy? Reading Check 9. Under what conditions does the federal government use fiscal policy? Why? Federal borrowing can slow down the economy. Many Americans buy government bonds. Bonds are a way to save for the future. Buyers plan to get their money back with interest later on. But people who save for the future have less money to spend now. Less spending means slower business growth. Federal borrowing can cause interest rates to rise. When the government borrows money, it leaves less money for others to borrow. This can cause the price of borrowing to go up. Long-term debt could cause investors to lose confidence in the government. People might begin to see the federal government as a bad investment. They could force the government to pay higher interest rates. Managing the Economy For much of U.S. history, the federal government did not take an active role in the economy. That changed during the Great Depression in the 1930s. Banks and businesses collapsed. Millions of people were out of work. President Roosevelt stepped in to help the economy recover. He started government programs to give people jobs and increase their income. In the late 1940s Congress set official goals for the economy. The goals were to: keep people working keep producing goods keep consumers buying goods and services The federal government has two tools it can use to achieve, or reach, these goals. One is monetary policy. The Federal Reserve is in charge of monetary policy. The other tool is fiscal policy. This is how the government uses taxes and spending to reach economic goals. The government spending by President Roosevelt is an example of fiscal policy. When the economy is shrinking or growing too slowly, fiscal policy is used to help it grow. The government spends more and taxes less. By spending more money, the government increases demand for goods and services. If demand increases, businesses will produce more. As a result, they may hire more workers. 279

8 NAME DATE CLASS Lesson 2: Fiscal Policy, Continued By cutting taxes, the government takes less of people s earnings. People keep more money. Economists think that if people have more money, they will spend it. This spending increases demand. The government usually takes these steps when the economy slows down or enters a recession. A plan to spur the economy by spending more and taxing less is called an economic stimulus. For example, in 2009 Congress passed a stimulus plan to help the country during a deep recession. Fiscal policy can be hard to put into practice. Many leaders do not agree with spending money when the government is already in debt. That makes it hard to agree on how much to spend and on what programs. Fiscal policy is slow, and its effects are hard to predict. The economy is complex, and a program may not always be strong enough to have the desired effect. For these reasons, the federal government prefers to use programs called automatic stabilizers. These programs help the economy automatically, without other action from the government. The two most important automatic stabilizers are unemployment insurance and the progressive income tax system. Both are always in place. They begin to work as soon as the economy slows down. For example, when people lose jobs in a recession, they start getting unemployment insurance payments. This program pays unemployed people an income while they look for new jobs. They spend the income and help keep the economy from slowing further. The federal income tax also works as a stabilizer because it is a progressive tax. When people lose their jobs, their income goes down, so they pay a lower percentage of their income in taxes. This partly makes up for the loss of income. When they go back to work, their income grows. They are then taxed at a higher rate. This helps the government to lower the deficit caused by the recession. Check for Understanding Explain what a government might do if its budget is not balanced. 1. Glue Foldable here List two problems that federal debt can cause Identifying 10. What are the drawbacks to fiscal policy? Mark the Text 11. Underline the definition of automatic stabilizers in the text. Vocabulary 12. Why are unemployment insurance and the progressive income tax known as automatic stabilizers? 13. Place a Foldable along the line. Write Government on the anchor tab. Label the tabs Budget Surplus and Budget Deficit. List two facts about each. 280