Background on Budget & Economy

Major components of FY2000 budget

Spending in FY2000's $1.8 trillion budget	Federal revenue sources
$405 billion (23%) Social Security payments $328 billion (18%) Medicare/Medicaid payments $215 billion (12%) interest on the National Debt $226 billion (13%) other ‘mandatory’ payments $262 billion (15%) national defense $330 billion (19%) other ‘discretionary spending’.	$900 billion (48%) individual income taxes $637 billion (34%) social insurance (FICA) $189 billion (10%) corporate income taxes $157 billion (8%) other taxes & duties

Balanced Budget Amendment (BBA)

A Constitutional requirement for a balanced federal budget was a hot issue in the previous Presidential campaign. But since the federal budget has now been ‘balanced,’ the impetus for an Amendment has been reduced. The debate now focuses on what fiscal restraints should be implemented to maintain a balanced budget in the future, and on what to do with the budget surplus.

The most recent budget surplus estimate (as of June 2000) is $1.9 trillion over 10 years, or $4.2 trillion including the Social Security Trust Fund.

Budget Deficit versus National Debt

A budget deficit means that the amount the government receives in taxes in one fiscal year is less than the amount that the government has spent. Generally, the government ‘borrows’ money from people by issuing bonds to cover the deficit.

The accumulated borrowing is the ‘National Debt’ that the government must repay in the future. The current federal debt stands at about $5.5 trillion, which is the equivalent of roughly $20,000 per person. The federal government pays about $200 billion in annual interest on the national debt.

Social Security Trust Fund

Much debate focuses on how the budget surplus is calculated and how the Social Security Trust Fund is accounted for. The Trust Fund is ‘off-budget,’ which means it is not counted in the reporting of the budget.

However, the government reports the budget surplus or deficit from a ‘Unified Budget’ which does include the Trust Fund. Hence the growth of the Fund offsets the shortfall in the budget. In 1998, the budget surplus was reported as $40 billion on the unified budget. Discounting the Trust Fund, the budget would have been in deficit by $50 billion.

The Federal Reserve

Alan Greenspan is the chairman of the Federal Reserve Board, which is known as ‘The Fed.’ The Federal Reserve chairman is appointed to a 4-year term by the President but then cannot be removed, to allow The Fed independence in monetary policy.

Greenspan’s primary responsibility is to set the interest rates that the government pays on its bonds. Those rates in turn determine bank interest rates, mortgage lending rates, and other interest rates.

When the Federal Reserve Bank feels that there is to much inflationary pressure, they are likely to raise interest rates to slow the economy down. Hence, Greenspan raises interest rates (‘tightens money’) when he sees the economy as ‘overheating,’ and lowers interest rates (‘loosens money’) when he sees deflation threatening.

The longest economic expansion in US history ended in October 2001. During 2001, Greenspan lowered interest an unprecedented 10 times in one year, to provide ‘monetary stimulus’ to the lagging economy. President Bush pushed for ‘fiscal stimulus’ by sending out $300 tax rebate checks to millions of taxpayers.

Background documents:

FY2000 Budget, full text.
National Debt, official accounting.
The Fed, official news.
UsBudget.com, All about Budget.

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