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The Budgetary Status of the Federal Reserve System

In the United States of America, the federal revenue has been generated by individual income taxes since 1950. It has been the largest single source averaging 8% of the GDP. The individual income tax has consistently provided nearly half of the total federal revenue since 1950 to date. Mandatory expenditures account for about 55% of the total government spending and they are all the expenditures controlled by the laws enacted by the federal government and not the Appropriations Act (Carson & Bonk, 1999). Mandatory expenditure is for entitlements and is funded by the government at whatever levels to cater for any costs that may arise from time to time.

On the other hand, discretionally expenditures refers to the government spending that caters for those activities that Congress must reauthorize every year and are just below 40% of the government spending for each year e.g. the construction of highways. Mandatory spending has claimed a larger share of the federal budget over the last four decades. The spending has doubled from 1962 from one-fourth of the federal spending to over half today (Meyers, 1985). Social security claims 33% of mandatory expenditure, medical care at 25%, Medicaid at 13% and the remaining 29% is taken up by income security programs such as food stamps, disability programs and retirement. Discretionally expenditure is paid for defense and domestic programs such as the construction of highways, agricultural subsidies and the federal courts. Mandatory expenditure taking up the largest share of the federal budget is a recent occurrence and has not been the case for the last four decades (Carson & Bonk, 1999).

The federal government transferred 12% of the total government revenue to state and local governments leaving it with 48% of total government revenue. This is an equivalent of one-seventh of the total government revenue. Among the organization for Economic Co-operation and Development (OECD) in 2008, only Mexico, Chile and Turkey had lower taxes than that of United States as a percentage of the GDP (Northrup, 2011). Because of the provision of extensive government services to their citizens compared to the United States, many European countries taxes exceeded by 40% of the GDP. The United States relies less on consumption taxes at 18% of the total tax receipts compared to an average of 32% of the total tax receipts among the 33 OECD countries.

The Congressional Budget Office projects its budget baseline ahead for 10 years and utilizes that as its timeline while the Office of Management and Budget has a timeline of 5 years (Committee on Finance, U.S Senate, 1989). The Congressional Budget Office shows a larger budget surplus since they do not consider the impact of extending any part of president Bush’s tax cuts of 2001 and 2003, providing relief from the minimum tax or extending any of the many “temporary” tax cuts that are routinely renewed and considering only a portion of the likely costs of the wars in Iraq and Afghanistan. Short –run budget projections tend to be highly inaccurate because of unforeseen changes in economic activity, changes in technical assumptions and changes in economic and other policies (Meyers, 1985). One reason that makes long-term budget projections more accurate and credible is that policy assumptions unlike technical and economic assumptions made for the long run may be more realistic for a while as compared to those made for the shorter run.

Entitlement spending is considered uncontrollable since it is ongoing such as social security and cannot be predicted with precision from year to year. Also, the fact  that the laws establishing entitlements specify the nature of the benefits and the eligibility for  benefits,  this puts the government in a situation whereby all eligible individuals  regardless of their number have to be paid the costs of the benefits and this makes entitlement spending uncontrollable. Entitlement spending can be controlled by changing the nature of the benefit or changing the eligibility criteria in terms of law (Meyers, 1985).

Tax “extenders” are tax laws which expire after a certain date. Congress enacts so many of these provisions since it wishes to avoid situations that force it to show a significant deterioration in the long term budget balance. The only two entities that were on budget but are now off budget are the Social Security System and the U.S Postal Service.

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