Federal Expenditures as a Percentageof GDPSpendingas30%apercentageofGDPRecessionofTotalexpenditures252007-2009PassageofMedicare20EndofWarinVietnam15Endof ColdWar10Purchasesof5goods and serviceso1950195519601965197019751980198519901995200020052010Figure 16.2FederalpurchasesandAs a percentage of GDP,federalfederalexpendituresasexpenditures are nowhigherthanever-a percentage ofGDP,1950-2012almost 25% of GDP.However a smallerproportion is now spentongovernment purchases of goods andservices (mostly military spending)6@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 6 Federal Expenditures as a Percentage of GDP As a percentage of GDP, federal expenditures are now higher than ever— almost 25% of GDP. However a smaller proportion is now spent on government purchases of goods and services (mostly military spending). Federal purchases and federal expenditures as a percentage of GDP, 1950-2012 Figure 16.2
What Does the Federal Government Spend Money On?Federal purchases consist ofdefense spending and "everythingelse",likesalariesofFBlagents,operating national parks, andOtherexpenditures8.2%funding scientific research.InterestpaymentsAroundhalf offederal11.2%expenditures are spent ontransfer payments,like SocialTransferpaymentsGrantstoSecurity,Medicare,and46.4%state and localgovernmentsunemployment insurance.12.6%The rest is spent on grants tostate and local governments to Defense spending21.7%support their activities, like crimeprevention and education; and onFigure 16.3Federalgovernmentpaying interest on the federalexpenditures,2012debt.2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 What Does the Federal Government Spend Money On? Federal purchases consist of defense spending and “everything else”, like salaries of FBI agents, operating national parks, and funding scientific research. Around half of federal expenditures are spent on transfer payments, like Social Security, Medicare, and unemployment insurance. The rest is spent on grants to state and local governments to support their activities, like crime prevention and education; and on paying interest on the federal debt. Federal government expenditures, 2012 Figure 16.3
Where Does the Federal Government Get Money From?The majority of federalrevenues comefromtaxes onindividual employment:individualincometaxesandOthertaxes andothersourcesofrevenue,“payroll taxes”earmarked to8.5%fund Social Security andMedicare.Corporate incometaxes,13.9%Taxes on corporate profitsIndividual incometaxes,constitute about one-seventh42.7%of federal receiptsThe remainder of federalSocial insurancetaxes,revenue comes from excise35.0%taxes (on cigarettes,gasolineetc.), tariffs on imports, andFigure 16.4Federal governmentrevenue,2012otherfeesfromfirmsandindividuals.2015PearsonEducation,Inc.8
© 2015 Pearson Education, Inc. 8 Where Does the Federal Government Get Money From? The majority of federal revenues come from taxes on individual employment: individual income taxes and “payroll taxes” earmarked to fund Social Security and Medicare. Taxes on corporate profits constitute about one-seventh of federal receipts. The remainder of federal revenue comes from excise taxes (on cigarettes, gasoline, etc.), tariffs on imports, and other fees from firms and individuals. Federal government revenue, 2012 Figure 16.4
MakingSocial Security and Medicare:Fiscal Time Bombs?theConnectionSocial Security and Medicare have helped to reduce poverty amongthe elderly, while Medicaid helps improve the health of poor people.. But the aging population and rising health care costs arecombining to put those programs in jeopardy.Through 2090, the budget shortfall for these programs is estimatedto beenormous:almost $6o trillion.SocialSecurity，25%Medicare,andMedicaidspendingasa20MedicareandMedicaidpercentageofGDP1510Social Security51962197219821992200220122022203220422052206220722082@2015Pearson Education,Inc.O
© 2015 Pearson Education, Inc. 9 Making the Connection Social Security and Medicare: Fiscal Time Bombs? Social Security and Medicare have helped to reduce poverty among the elderly, while Medicaid helps improve the health of poor people. • But the aging population and rising health care costs are combining to put those programs in jeopardy. • Through 2090, the budget shortfall for these programs is estimated to be enormous: almost $60 trillion
MakingSocial Security and Medicare: Is There a Fix?theConnectionHow can these programs continuetoexist?It is likelythat a combination of these measures will eventually needto be adopted:IncreasingtaxesDecreasing benefits (including slower benefit growth, perhapsdifferently for different income groups)Decreasing eligibility (SSl age already increasing from 65 to 67)But perhaps the most important element will be finding a way toreducemedicalcosts10@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 10 Making the Connection Social Security and Medicare: Is There a Fix? How can these programs continue to exist? It is likely that a combination of these measures will eventually need to be adopted: • Increasing taxes • Decreasing benefits (including slower benefit growth, perhaps differently for different income groups) • Decreasing eligibility (SSI age already increasing from 65 to 67) But perhaps the most important element will be finding a way to reduce medical costs