4.The Share of Tax Revenue Going to Discretionary Spending

The materials in the book for this module shows that the share of total federal spending on entitlements has increased during the past 20 years. Also, it shows that during the late 1990s, the percentage of tax revenues rose above 100 percent, meaning that the federal government officially operated with surpluses and paid down some of its outstanding debts.

After the late 1990s, however, the percentage of tax revenues available to cover discretionary spending after paying entitlements steadily declined. Since the late 2000s, this percentage has dropped substantially.

Indeed, during periods in which the percentage of tax revenues available to allocate to discretionary spending has been zero or negative, the federal government's tax revenues have been insufficient to pay for any of its discretionary spending. During these intervals, all discretionary spending has been financed with borrowed funds.

Borrowing in Part to Cover Entitlement Spending

When the share of federal tax revenues allocated to discretionary spending is below zero, the government borrows more than the amount of its discretionary spending. During these intervals, the government borrows funds to help pay some of its non-controllable expenditures on entitlements as well as to cover its discretionary spending.

a. What would be true of entitlement spending if the percentage of taxes allocated to discretionary spending rose to 100 percent and the federal budget was balanced? (Hint: Under a balanced budget, tax revenues equal the sum of discretionary and nondiscretionary expenditures.)

b. How would entitlement spending be funded if tax revenues just covered discretionary spending and there was a government budget deficit?