Washington’s professional politicians are doing their level best to use the prospect of fearsome sequestration budget cuts to scare the rest of us into endless refrains of “Lions and tigers and bears, oh my!” Continue reading ‘Air Force Bake Sales and Sequestration’ »
Government borrowing is a source of many evils, not least of which is that for decades it made big government appear cheaper than it is. Could the federal government spend nearly $4 trillion a year if it had to raise every penny through taxation? Unlikely. A tax revolt would have been ignited. But let the government borrow a trillion dollars a year, more than 40 cents of every dollar spent, and government looks relatively inexpensive—or it did before things got so out of hand that everyone could see the looming danger. Most people pay no attention to how much interest the government must pay each year to its creditors, but interest payments have been running at over $400 billion a year. December’s [2012] payment alone was $95.7 billion.
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That money represents resources that were previously diverted from the productive private sector to the government for purposes chosen by politicians looking out for their careers. The interest payment goes back into the private sector, but since government continues to borrow to pay its debts, it’s still taking resources from the productive sector. Also, when the Federal Reserve buys up government debt, it remits the interest (minus overhead) to the Treasury. Such interest-free borrowing might make credit look inexpensive, except for the fact that the Fed creates money when it buys the debt, which threatens potential price inflation, an implicit tax on the people’s cash balances, distorts relative prices,and depresses interest rates, skewing investment decisions.
Borrowing appears to be a voluntary form of funding government, but [Destutt de Tracy (1754-1836) in A Treatise on Political Economy] wrote that “this an illusion [because the lenders] force the government to raise, one day or other, a sum equal to that which they furnish and to the interest which they demand for it. Thus, by their obligingness, they burthen without their consent not only the citizens actually existing, but also future generations….”
Such burdening of people yet to be born offended Tracy, and he proposed that “whatsoever is decreed by any legislature whatsoever, their successors can always modify, change, annul; and that it should be solemnly declared, that in future this salutary principle shall be applied, as it ought to be, to the engagements which a government may make with money lenders. By this the evil would be destroyed in its root: for capitalists, having no longer any guarantee, would no longer lend.”
The term Revenue refers to income that is received by the federal government. (The executive branch also uses receipts as a term for revenue.) Revenue may be raised from a variety of different sources, although they primarily stem from individual income taxes, social insurance taxes, corporate income taxes and excise taxes. Revenue may additionally be raised by fees, tariffs, fines, bequests and gifts. Tax expenditures refer to revenues that are foregone as a result of an exemption, deduction or other exception.
Whenever legislation is enacted by Congress that provides the legal authority for an agency to spend money, it is said to be providing budget authority. The most well known form of this type of legislation that provides budget authority is the annual appropriations act. Agencies are authorized to enter into obligations by budget authority.
An obligation is any form of action that establishes a financial liability on the part of the federal government. This could include entering into a contract, submitting purchase orders, etc. Anytime an obligation is liquidated, the result is an outlay. An outlay represents the actual payment of the obligation. This commonly occurs through electronic fund transfers or in some cases, the issuance of a check or disbursement of cash. The stages in which obligations and outlays take place are known as the spending pipeline. The spendout rate refers to the rate at which funds are spent. A spendout rate can vary from one account to another as well as from program to program.
While Congress is able to exercise direct control over budget authority, its influence regarding obligations and to some degree, outlays, is indirect. It is federal agencies that ultimately determine outlay levels.
Two terms frequently associated with the federal budget include surplus and deficit. Surplus refers to an excess of revenues over outlays, while a deficit is an excess of outlays over revenues.
Congress and the president utilize baseline budgeting to analyze budget policy choices. A baseline is a set of projections for future spending and revenues that results in a surplus or deficit based on assumptions made regarding the state of the economy as well as the continuation of current policies, assuming no changes are made.
