Wednesday March 12, 2014• OBJ: SWBAT

demonstrate understanding of the budget process through simulation.

• Drill: What does this say about the budget? What problems do you see? What groups are left out?

• HW:

Fiscal Policy vs. Monetary Policy• Fiscal policy relates to government spending and

revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations.

• Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR)for banks. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply.

What is the Federal Budget?• The federal budget is:• a plan for how the government spends

taxpayers’money. • What activities are funded? How much should we

spend for defense, national parks, the FBI, Medicare, and meat and fish inspection?

• a plan for how the government pays for its activities.

• How much revenue does it raise through different kinds of taxes--income taxes, excise taxes (taxes applied to various products, including alcohol, tobacco, transportation fuels and telephone services), and social insurance payroll taxes.

• a plan for government borrowing or the repayment of borrowed funds.

• If revenues are greater than spending, the government runs a surplus. If expenses are greater than revenues (as is currently the case), the government runs a deficit.

• something that affects the nation's economy. • Some types of spending--such as improvements

in education and support for science and technology—increase productivity and raise incomes in the future.

• Taxes, on the other hand, reduce incomes, leaving people with less money to spend.

• something that is affected by the nation's economy.

• When the economy is doing poorly, people are earning less and unemployment is high. In this atmosphere, revenues decrease and the deficit grows.

• an historical record. • The budget reports on how the government

has spent money in the past, and how that spending was financed.

• The 2011 budget document embodies the President's budget proposal to Congress for fiscal year 2011, which begins on October 1, 2010. It reflects the President's priorities and proposes his initiative to meet our national and international needs.

• • The federal budget, of course, is not the only budget that

affects the economy or the American people. The budgets of state and local governments have an impact as well. State and local governments are independent of the federal government, and they have their own sources of revenue (taxes and borrowing).

The 1974 Budget Act

• Centralized and Regularized the Budget Process• Created Budget Committee in each chamber• Created Congressional Budget Office (CBO)• House Committee

– rotating membership– partisan– Members have “turf“ interests, Committee is Privileged

• Senate Committee– Traditional in many ways– Prestigious/powerful committee

Some Details

• CBO: Provides Estimates and Baselines• The Timetable's Lack of Teeth

• The Budget Resolution’s “dimensions” – Revenues, Expenses, – Multi-year forecasts

• The Budget Resolution as a “Soft" Upper Limit– Establishes points of order – Importance of waivers in House

What is a Deficit? What is a Surplus?• When President Clinton was first elected in 1992, the

federal budget was in a deficit. During the 1990’s, as a result a strong economy, the government brought in much higher revenues than expected and began, by the end of the decade, to run a budget surplus. In 2002, as a result of September 11, increased military spending and anti-terrorism spending, tax cuts, and the downturn in the economy, the federal budget went back into deficit. In October 2009, the Congressional Budget Office (CBO) estimated a deficit for FY 2009 of $1.4 trillion—a figure that includes the cost of the cost of TARP and stimulus spending for the fiscal year. See Chart 4 (the dollars represent billions of dollars).

FIGURE 12.1. Annual surplus (+) or deficit (-) in billions of dollars, for fiscal years 1946-2006. Source: Congressional Budget Office.

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-300

-200

-100

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200

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Spending• To better understand federal spending, let’s

look briefly at the FY 2010 federal budget in which the government projected it would spend approximately $3.6 trillion. Federal spending is divided into mandatory spending which is required by law, and discretionary spending which is decided upon yearly by the President and Congress.

• Social Security is the largest mandatory spending.

Entitlements

• Federal programs that guarantee a specific level of benefits to persons who meet requirements set by law

• Person is “entitled” to benefits if they meet the criteria set by the federal government

• Spending on entitlements is mandated by the Federal law

Examples-Social Security-Medicare-Medicaid-V.A. Programs-Unemployment Programs-Food Stamps-Retirement Plans for Federal Employees

Entitlements

Positives• Provides needed benefits to

American citizens• Government cannot delay

or avoid payment in the budget

Negatives• No Congressional discretion

on money allotted• 2/3 of budget• Less money for

discretionary spending

Proposed at the State of the Union Message in January

The Budget Process

Office of Management and Budget(OMB)

• OMB sends instructions to agencies• Agencies send requests to OMB• OMB revises the budget

Congressional Budget Office(CBO)

• President submits budget to Congress by the first week in February

• CBO looks over and sends report to both chambers of Congress

Appropriations Committee

• The appropriations committee holds hearings and sets budget targets

• Reconciliation bills are made of budget does not meet targets

Finalizing the Budget

• By October 1st, all appropriations bills should be passed

• If they are not passed, Congress has to pass a continuing resolution where agencies run on last year’s budget

Creating the Budget • Read the Rules of the Game• Get into a group of 4-5.• You will be creating your own Federal Budget• In your groups discuss the mandatory

spending (will you increase it or decrease it) use the descriptions to help you make up your mind.

• Red Chips can be used for deficit spending.• Write up a summary of your budget and why

it looks the way it does.

Wrap Up

• What problems did you run into while trying to complete your budget?

• Why do you think the government has so much trouble?