Ch. 25 Section 3 Managing the Economy Surpluses and Deficits Budgets are built on forecasts or predictions of the future If expenses are higher than expected or revenues for the year are lower than expected, the budget is in trouble. Surpluses and Deficits (cont.) A government’s surplus is when it spends less than it collects in revenue. A government runs a deficit if it spends more than it collects When the government runs a deficit, it must borrow money to pay its bills. It does this by selling bonds. Surpluses and Deficits (cont.) A bond is a contract to repay the borrowed money with interest at a specific time in the future. All the money that has been borrowed over the years but not yet repaid is the government’s overall debt. Surpluses and Deficits (cont.) The U.S. is in debt $9.6 Trillion due to the 1980’s – early 1990’s. 304 million people in the U.S., that equates to about $31,600 for each person if you broke it down. Surpluses and Deficits (cont.) When spending equals revenue collected, the government has a balanced budget. Federal government is not required to have a balanced budget; can borrow as needed to pay for services and programs State and local governments are prohibited from borrowing to pay for operating expenses Fiscal Policy One of the roles of the government is to manage the pace of economic activity. Remember the federal government uses fiscal policy – the use of cutting taxes and increasing spending to stimulate the economy. Fiscal Policy (cont.) In theory, the government would cut taxes and increase spending to stimulate economic growth. When the economy picks up, the government should reduce spending and increase taxes This would create a surplus, which could essentially lower our countries debt. Fiscal Policy (cont.) In actual practice, making decisions is difficult. Despite the state of the economy, most people in America want low taxes At the same time, people demand to have more government services available to them, making it difficult for the government to cut spending The result is the government spending when no stimulus is needed. Fiscal Policy (cont.) When stimulus is needed for our economy, politicians often argue over how the money should be spent. When a stimulus plan is finally agreed upon, Appropriation Bills may take time to pass through Congress. By that time, the economic situation has changed Automatic Stabilizers Fortunately for Americans, we do not have to solely rely on the decisions of politicians. Our economy has a number of automatic stabilizers which stimulate the economy when the time is needed. These are already in place and do not need further action from government Automatic Stabilizers (cont.) 1. Unemployment insurance programs when people lose their jobs, unemployment payments provide help and stability until people can find a job and get back on their feet. 2. Welfare programs people can collect welfare and Medicaid when their incomes fall below a certain level; help prevent consumer demand from falling even lower (which causes further worker lay-off) Automatic Stabilizers (cont.) 3. Progressive income tax When people lose their jobs, their income goes down. When this happens they pay less in taxes which eases the impact of the cut in income When the economy recovers, the opposite is supposed to occur. People make more money, and less entitlements are needed. Automatic Stabilizers (cont.) Automatic stabilizers go into effect more rapidly than fiscal policies that politicians choose to implement.