Government Budget Essay

 

It is worthwhile to have the students consider the 2004 budget and to write about what they would do to bring the budget into balance.  Of course, there is no definitive answer and the students will be getting into normative issues.  It is important for the teacher to let the students make their own decisions but to require students to use good economic thinking regardless of the position they may take.  It also gives the student the opportunity to deal with actual data.

 

Some additional data is provided for discussion and writing use.

 

Issues for the students:

 

A. What is the real deficit?

 

The total budget for 2004 included

            Total Revenues:            $1,880,071,000,000

            Total Spending:   2,292,215,000,000

            Total deficit:                  $   412,144,000,000

 

In the fiscal year 2004 the federal government planned on borrowing $412,144,000,000 to be paid back later by future taxpayers. Does the reader think that this is a problem?

 

Students should understand the impact of the social security trust fund on the budget. To date the social security trust fund is in surplus.  Since the 1969 the Federal government has used the unified or consolidated budget approach.  Basically, this means that they combine the Social Security Trust Fund revenues and outlays with the federal government planned revenues and outlays.  Remember in 1969 the U.S. was engaged in the Vietnam War and the unifying the budget would lessen the reported deficit.  (The Social Security Trust Fund was running a surplus).  What happens if we separate the Social Security Trust Fund revenues and outlays from the 2004 budget?

 

2004 unified budget:     Revenues                      Outlays                      Surplus or Deficit ( )

                                    $1,880,071,000,000    $2,292,215,000,000  ($412,144,000,000)            

2004 Social Security:       733,400,000,000         495,548,000,000    $237,852,000,000

 2004 planned deficit

           Excluding Soc. Sec.                                                                   (649,996,000,000)

 

Note that the Social Security Trust Fund has been running surpluses that were borrowed by the Federal government to fund non-social security outlays.

(Note that the above includes only the planned deficits.  The actual deficit was more)

 

When politicians talk about putting the social security funds in a “lockbox” to assure voters that they will not tamper with the well being of the program what does this mean?

 

Have the students discuss the pros and cons of using the unified budget approach.  The following is some additional data that can be used by the class.

 

The following data is taken from the source: www.publicdebt.treas.gov

 

public debt

 

 

This is monies borrowed

 

 

 

from Federal Trusts

 

 

 

 

Funds. Almost all from

 

 

 

 

Soc. Security Trust

 

 

 

Debt Held by the

Intragovernmental

total

source: treasury dept.

 

Public

Holdings

Total

 

9/30/2005

 $   4,601,238,726,062

 $   3,331,470,935,661

 $         7,932,709,661,723

 

9/30/2004

 $   4,307,344,596,908

 $   3,071,708,099,421

 $         7,379,052,696,329

 

9/30/2003

 $   3,924,090,106,880

 $   2,859,140,955,862

 $         6,783,231,062,742

 

9/30/2002

 $   3,553,180,247,874

 $   2,675,055,717,722

 $         6,228,235,965,596

 

9/28/2001

 $   3,339,310,176,094

 $   2,468,153,236,105

 $         5,807,463,412,199

 

9/28/2000

 $   3,405,303,490,221

 $   2,268,874,719,665

 $         5,674,178,209,886

 

9/30/1999

 $   3,636,104,594,501

 $   2,020,166,307,131

 $         5,656,270,901,632

 

9/30/1998

 $   3,733,864,472,163

 $   1,792,328,536,734

 $         5,526,193,008,897

 

 

 

 

 

Writing Assignment One

 

A simple assignment at this point would be to ask students to make decisions on how they would balance the budget:

 

Would they increase taxes?  If so, what taxes would they increase.

Would they cut spending?  If so, what spending would they cut.

Would they increase taxes and cut spending?  If so, what taxes and what spending

 

Students should look at what has happened to Federal Debt over the last 8 years.  They should understand that the difference from year to year is the yearly deficits.  They could calculate the percentage changes for the years 1999 through 2005.

 

 

 

 

 

 

 

 

 

 

                                                      Public Debt                  Intragovernment           Total

annual deficits

9/30/2005

 $      293,894,129,154

 $      259,762,836,240

 $            553,656,965,394

( ) indicates surplus

9/30/2004

 $      383,254,490,028

 $      212,567,143,559

 $            595,821,633,587

 

9/30/2003

 $      370,909,859,006

 $      184,085,238,140

 $            554,995,097,146

 

9/30/2002

 $      213,870,071,780

 $      206,902,481,617

 $            420,772,553,397

 

9/28/2001

 $       (65,993,314,127)

 $      199,278,516,440

 $            133,285,202,313

 

9/28/2000

 $     (230,801,104,280)

 $      248,708,412,534

 $             17,907,308,254

 

9/30/1999

 $       (97,759,877,662)

 $      227,837,770,397

 $            130,077,892,735

 

9/30/1998

 

 

 

 

Note that a negative change ( ) indicates a surplus. In 1999, 2000, and 2001 the federal government had a surplus in terms of debt held by the public. It was still however borrowing from the social security surplus.

The above gives us the deficits and surpluses for the years 1999 through 2005.  Basically the first column is the total borrowed from the public.  The second column gives us the amount borrowed from Social Security and the third column gives us the combined borrowing from the public and the Trust fund.

 

Writing Assignment 2

Do deficits matter?

 

Students should discuss and write an essay of the problem of deficits.  Understand that one can find economists that argue either side of the argument.  It is not simply liberal versus conservative stances.  There are liberals that would advocate more spending on social programs even if it leads to further debt and there are those that believe that social programs should be supported but that deficits are a problem that needs to be addressed. There are conservatives that argue that deficits are not important and that increasing debt though not most will at least “starve the beast.”  This means that increasing debt leaves the government without the financial resources to fund social programs.  There are conservatives that believe the budget should be balanced and that to continue to deficit spend is financially irresponsible.

 

The following are some of the problems that may arise from deficits.  Remember there are two sides to each and the student needs only to provide a good economic argument.

 

Deficits lead to the crowding out effect.  As the government borrows more money the interest rates will rise and the public sector will borrow less resulting in less investment.

 

Deficits mean that the Federal government will have to devote a larger portion of its annual budget to servicing that debt. (Pay more interest).

 

Deficits mean that future generations will have to finance today’s spending by the government, thus, they will be less able to make their own collective decisions on what the government should be spending on.

 

Budget deficits lead to trade deficits.  As the federal government borrows more and more money, an increasing amount of the debt is financed by foreign sources.  As more money flows into government debt from outside the country (financial capital flow into the U.S.)    More money will flow from the U.S. to foreign countries as the U.S. imports more.

 

Budget deficits mean that the U.S. becomes more dependent on foreign capital.  This weakens the U.S. in geo-political influence.  For example, if China is financing our debt by hundreds of billions of dollars a year will the U.S. be able to stand up to China in terms of other issues or will the U.S. be vulnerable when dealing with China for fear that China will remove all of its capital from the U.S. causing severe financial problems.