U.S. Government BudgetWhy can’t we balance it?

What is a Budget?

Income Expenses

The Government BudgetGovernment SpendingGovernment Revenue

Taxes All Gov’t Expenses

Budget Handout

Deficit vs. Debt

• Deficit: how much more Government spends than it receives in tax revenue over 1- year– $649 Billion

• Debt: total amount Government owes (has borrowed)– $18.4 Trillion

Balancing the Budget?

• Total Spending: $3.6 Trillion

• Total Revenue $3.0 Trillion

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• Total Deficit: $649 Billion

• Total Debt: $18.4 Trillion

17.8 Trillion = GDP = C + I + G + (X-M)

Government Spending (2014)

• Social Security 23.5%

• Medicare 14.0%

• Medicaid 8.5%

• Interest on Debt 6.3%

• Defense Spending 16.7%

• Homeland Security 1.0%

• Education 2.0%

• Other 27.0

• Total 100.0%

46% of Budget

23% of Budget

What are Entitlements?Social Security, Medicare & Medicaid

Social Security Medicare Medicaid

THANK YOU!

Wake-Up Call Video

http://www.cbsnews.com/stories/2007/03/01/60minutes/main2528226.shtml

What are Entitlements?Social Security, Medicare & Medicaid

Social Security Medicare Medicaid

US Demographics

• America’s population is aging– smaller young (echoboomer) generation

– Babyboomers beginning to retire

– By 2040 1 in 4 Americans will be over 65

• Average life span has risen– 77 years men, 81 years women

– why: advances in medical technology, nutrition, etc…

• This FACT ensures that entitlement spending will increase a rapidly growing rate

Entitlement Spending• Includes- Social Security, Medicare & Medicaid

– Citizens are “entitled” to benefits at 65 years of age

• Largest part of Government budget– Consumes approximately 46% of budget in 2014!

• Projected to 60%-75% by 2040!

Growth of Entitlement Spending

*Current services estimate.

Source: Budget of the United States Government, FY 2005, Office of Management and Budget.

Defense Social Security

Net interest

Medicare & Medicaid

All other spending

1964 1984 2004*

9% 19%

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Entitlement Reform?

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Interest on Gov’t debt

• The government sells bonds to pay for deficit spending

• Interest payments on bonds are 6% of budget today– could rise to 15% by 2020

• Entitlements & interest on debt alone could reach 75-90% of budget by 2040!

Growing Entitlement Spending

Kicking the Can Down the Road

Social Security

Problems increase as theBabyboomers Retire!

Medicare

spending

spending Medicare problem 5 times bigger!

USA spends 16% of GDP

11% of GDP for other countries

Cyclical vs. Structural Problems

• Cyclical economic issues are related to the business cycle & “fix themselves” as the economy recovers

• Example: Unemployment during a recession goes away at the peak

• Structural economic issues need policy changes to correct– Example: low performing public schools in cities (think Oakland, New York, etc…)

Structural economic issues are significantly more problematic than Cyclical economic issues

Structural deficit: occurs with the economy at full potential output (peak of business cycle, high GDP)

• Structural deficits remain even at the peak of a business cycle

Cyclical deficit: Portion of deficit attributable to a slowdown in the business cycle (during recession)

• Cyclical deficits “self regulate” or fix themselves as economy recovers

2-Types of Gov’t Deficits

Entitlement Worksheet

Changing EntitlementsSocial Security, Medicare & Medicaid

Social Security Medicare

Balancing the Budget?

“The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Ben Bernanke

2010

Boomerang Kids

• https://www.youtube.com/watch?v=uwMxOsD2Dhg