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US and Russia federal budget. How is money spent by the government?
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In fiscal year 2015, the federal budget of the US was $3.8 trillion. These trillions of dollars make up about 21 percent of the U.S. economy (as measured by Gross Domestic Product, or GDP). It's also about $12,000 for every woman, man and child in the United States.
The U.S. Treasury divides all federal spending into three groups: mandatory spending, discretionary spending and interest on debt. Mandatory and discretionary spending account for more than ninety percent of all federal spending, and pay for all of the government services and programs on which we rely. Interest on debt, which is a much smaller amount than the other two categories, is the interest the government pays on its accumulated debt, minus interest income received by the government for assets it owns.
Discretionary spending refers to the portion of the budget that is decided by Congress through the annual appropriations process each year. These spending levels are set each year by Congress. By far, the biggest category of discretionary spending is spending on the Pentagon and related military programs.
Mandatory spending is spending that Congress legislates outside of the annual appropriations process, usually less than once a year. It is dominated by the well-known earned-benefit programs Social Security and Medicare. It also includes widely used safety net programs like the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and a significant amount of federal spending on transportation, among other things.
The Russian government approves a draft budget for 2015. As a result of the economic slowdown and falling oil price, 700 billion roubles of previous spending plans have been cut back, and 300 billion of new revenues have been identified. The budget forecasts a deficit of 0.6% of GDP next year, based on average oil price of $100.
On 18 September, the Russian government approved a draft federal budget for 2015, which it must present to the State Duma by 1 October for agreement.
The economic slowdown and the lower oil price have left a hole of around one trillion roubles in the previous 2015 budget plan, which was agreed in 2013. Russian policymakers remain reluctant to increase levels of government debt: last week, Deputy Prime Minister Dvorkovich said that international borrowing constraints made it “more important than ever” that Russia lived within its means. Therefore, the Finance Ministry developed proposals to find the additional one trillion by removing around 700 billion roubles of previously-planned expenditure and identifying around 300 billion roubles of new revenues.
Full details have not yet been released, but reports suggest that previous spending plans for healthcare, social insurance and transfers to the pension fund will be cut back. New revenues are expected to come from increased taxes on online commerce, tobacco and alcohol, new export duties on Gazprom’s exports via the Blue Stream pipeline, and the sale of a further 19.5% stake in state oil company Rosneft.
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With these amendments, the budget forecasts a relatively modest deficit of 0.6% of GDP next year. However, this assumes growth of 1.2% in 2015 (previous plans had forecast 3.1%) and an average Urals oil price of $100/barrel (previous plans had been based on $105/barrel). The Finance Ministry has stated that if revenues are less than predicted, it will dip into the Reserve Fund to meet the 0.6% deficit target.
Plans for defence spending have escaped untouched. The military budget is still expected to rise over 20% next year, as part of a 85% increase between 2012 and 2017. However, Finance Minister Siluanov said on 19 September that the Russian military would “eventually have to optimize and reduce its share”.
In addition to proposed amendments to the budget, the government has agreed to use part of the National Welfare Fund (NWF) to buy bonds from Russian companies which have been targeted by sanctions and which are therefore unable to raise finance on international markets.
During the government’s meeting on 18 September, Prime Minister Medvedev said that the 2015 budget had been the most difficult he had worked on. The economic slowdown had been “exacerbated by the implementation of sanctions on individual sectors of the economy”, which meant that an “already tight” budget had to be adjusted further.
2.
B 2-a 3-c 4-d 5-d 6-c 7-b 8-e 9-a 10-a
a)
- The very first beneficiary of Social Security was Ida May Fuller. Ida May worked for only three years after the establishment of the Social Security system, and paid a total of $24.75 in Social
Security taxes. She was dropped by the Social Security office; as she later said, “It wasn’t that I expected anything, mind you, but I knew I’d been paying for something called Social Security, and
I wanted to ask the people in this country about it.” Ida May’s case was the first
one processed by the new Social Security Administration, and so the first Social
Security check in U.S. history was issued for $22.54. Ida May went on to live for 35 more years, dying at age 100 in 1975. Over those 35 years, she collected a total of $22,888.92 in Social Security benefits. Quite a return on her $24.75 investment! Ida May is a striking example of the first generation of Social Security beneficiaries who were the big winners under this new social program.
This example illustrates two points. First, the rate of return provided by an unfunded Social Security to “middle generations” depends on the rates of population and wage growth. Second, unfunded
Social Security carries with it what Diamond and Orszag (2004) call a legacy debt. The unfunded transfers to the Ida Fullers and others in the first generation of retirees receiving Social Security put the system immediately into a large debt. If society decided to end the Social Security program, the existing generation of older workers and retirees, who paid the taxes to support the program, would receive no benefits, and so their past tax payments would end up paying off the debt. It seems unlikely that the political process would allow a single generation of workers to be held accountable for this large debt. Thus, reforms of the Social Security system must all grapple with the fact that this debt must be somehow paid before we can bring our unfunded Social Security system into balance.
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3.2. Suppose the federal government is considering raising the minimum wage to $10 per hour. An economist testifies to Congress that this plan is inefficient and causes deadweight loss.
a) Show graphically the deadweight loss caused by the minimum wage law.
b) Suppose that you are a member of Congress and you believe in the utilitarian social welfare function. How would you determine whether to vote for or against the policy?
c) Explain why this policy choice demonstrates a trade-off between equity and efficiency.
d) Explain the Earned Income Tax Credit. Explain why the EITC may provide equity with small losses in efficiency.
VARIANT 27
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