Chapter 6 – The Role of Government
ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Patrick J. Welch
&
St. Louis University
Gerry F. Welch
St. Louis Community College
at Meramec
PowerPoint Presentation by:
Dr. Ray Everett
Pima Community College
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.
Role of Government in the Macroeconomy
Contents
Expenditures & Revenues
Fiscal Policy
Government Budgets
National Debt
Role of Government in the Macroeconomy
Chapter Objectives
• To identify the major types of expenditures and the major sources of
revenue of the federal, state, and local governments.
• To distinguish among progressive, proportional, and regressive taxes.
• To discuss recent tax issues and reforms.
• To introduce fiscal policy, explain its mechanics, and differentiate
between discretionary and automatic fiscal policy.
• To define a surplus, balanced, and deficit budget, and identify the
economic impact of each.
• To explain the relationship between the federal budget and fiscal
policy.
• To discuss some realities of fiscal policy and the budgetary process
that can hamper the attainment of fiscal policy objectives.
• To define the national debt, explain its financing, size, and burden on
taxpayers, and introduce crowding out.
Government Expenditures & Revenues
• Government Expenditures Overview
TABLE 6-2
Total, Federal, and State and Local Government Expenditures, and
Total Government Expenditures as a Percentage of GDP, Selected
Years 1979-2000 (Billions of Dollars)
6-1a
Government Expenditures & Revenues
• Categories of Government Expenditures
 Government purchases of goods & services
• Government spending on new goods and services.
• Public Good
– Good or service provided for all of society.
• Quasi-Public Good
– Government-provided good that could be sold in a private
market.
 Transfer Payments
• Money from the government for which no direct work is
required in return.
 Interest paid on borrowed funds
 Grants-in-aid to state and local governments
6-1b
Government Expenditures & Revenues
• Categories of Government Expenditures (cont.)
6-1c
Government Expenditures & Revenues
• Government Revenues Overview
6-1d
Government Expenditures & Revenues
• Government Revenues Overview (cont.)
6-1e
Government Expenditures & Revenues
• Sources of Government Revenue
 Social Insurance Program
• Contributions from an individual’s wages are made to a
fund from which that individual may draw when eligible for
benefits.
6-1f
Government Expenditures & Revenues
• Progressive, Proportional, & Regressive Taxes
 Progressive Tax
• Tax reflecting a direct relationship between the percentage
of income taxed and the size of the income.
– As income increases, so too does the rate at which that
income is taxed, and vice versa.
 Proportional Tax
• Also called a flat tax.
• Tax equal to the same percentage of income regardless of
the size of the income.
– As income increases or decreases, the rate at which that
income is taxed remains constant.
 Regressive Tax
• Tax reflecting an inverse relationship between the
percentage of income taxes and the size of the income.
– As income increases, the rate at which that income is
taxed decreases, and vice versa.
6-1g
Government Expenditures & Revenues
• Tax Reform & Issues
 Tax Reform
• Changes in tax policies and structures.
 Tax Bracket Indexation
• Policy of adjusting income tax brackets to account for
inflation.
 Tax Reform Act of 1986
• Major legislation that changed federal income tax
exemptions, deductions, brackets, and rates.
 Tax Base
• Particular thing on which a tax is levied.
 Tax Rate
• The amount that is levied on the base.
 Tax Abatement
• Policy of reducing or eliminating a tax that would normally
be charged.
6-1h
Fiscal Policy
• Fiscal Policy
 Influencing the levels of aggregate output and
employment or prices through changes in federal
government purchases, transfer payments, and/or taxes.
• Mechanics of Fiscal Policy (Examples)
 Unemployment due to a decline in spending can be
resolved by any or all of the following:
• Increasing government purchases of goods and services
• Increasing transfer payments
• Decreasing taxes
 Demand-pull inflation from too much spending can be
resolved by any or all of the following:
• Decreasing government purchases of good and services
• Decreasing transfer payments
• Increasing taxes
6-2a
Fiscal Policy
• Types of Fiscal Policies
 Discretionary Fiscal Policy
• Deliberate changes in government expenditures and/or
taxes to control unemployment or demand-pull inflation.
 Automatic Fiscal Policy
• Also called automatic stabilization.
• Changes in government expenditures and/or taxes that
occur automatically as the level of economic activity
changes.
– Helps to control unemployment or demand-pull inflation.
6-2b
Fiscal Policy
6-2c
• Types of Fiscal Policies (cont.)
TABLE 6-5
Fiscal Policy Summary
Government Budgets
• Types of Budgets
 Balanced Budget
• Government’s total expenditures equal its total revenues.
 Surplus Budget
• Government’s revenues are greater than its expenditures.
 Deficit Budget
• Government’s expenditures are greater than its revenues.
6-3a
Government Budgets
• Types of Budgets (cont.)
TABLE 6-6
Federal Budget Receipts, Outlays, and Surpluses or
Deficits for Fiscal Years 1940–2002 (Billions of Dollars)
6-3b
Government Budgets
• Types of Budgets (cont.)
TABLE 6-6
(continued)
6-3c
Government Budgets
• Beyond the Budget Figures
 Unified Budget
• Budget that assembles all federal government receipts and
outlays, and the resulting overall deficit or surplus, in one
report.
 Trust Fund
• Restricted fund.
– Payments from this fund are specified as to recipients
and/or uses.
 Entitlement
• Programs set up by the government to pay benefits to
people who meet the eligibility requirements of the
programs.
 On-Budget/Off-Budget
• Categories of the unified budget established by Congress.
– Generally refers to programs that have immediately
controllable and noncontrollable receipts and expenses.
6-3d
Government Budgets
• Beyond the Budget Figures (cont.)
TABLE 6-7
Federal Government Unified, On-Budget, and
Off-Budget Balances, 1990–2002 (Billions of Dollars)
6-3e
Government Budgets
• Budget & Fiscal Policy Summary
 Surplus Budget
• Dampens aggregate spending and can aid in managing
demand-pull inflation.
 Deficit Budget
• Increases aggregate spending and can help to reverse a
recession.
 Balanced Budget
• Can slightly expand the economy.
6-3f
National Debt
• National Debt Overview
 Accumulated total debt of the federal government due to
deficit spending.
6-4a
National Debt
• National Debt Overview (cont.)
6-4b
National Debt
• Financing the National Debt
 U.S. Treasury Security
• Issued by the federal government in return for funds lent to
it.
– Largest portion of the national debt is held by private
investors, and the rest is owned by the Federal Reserve
Banks, government agencies, and trusts.
• Assessing the National Debt
 Debt Service
• Cost of maintaining a debt.
– Generally measured in interest costs.
 Crowding Out
• Occurs when borrowing by the federal government reduces
borrowing by households and businesses.
6-4c
National Debt
• Assessing the National Debt (cont.)
FIGURE 6-2
National Debt as a Percentage of GDP, 1970–2000
6-4d
Chapter 6 – The Role of Government
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ECONOMICS
THEORY AND PRACTICE
Seventh Edition
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