Online Lesson

EconomicsMinute
National Budget Simulation

Key Economic Concepts:

• Budget
• Government Expenditures
• Trade-off

Description:

Students serve as an Economic Advisor to the President, who must increase military spending out of political necessity, but needs to reduce spending in other programs to limit the deficit. Conflicting goals create a need for compromise and tradeoffs to create a national budget, while trying to remain under deficit limits.

Lesson Objectives:

Students will:

• Identify the major spending categories for the federal government.
• Identify how changes in federal spending affect budget deficits.
• Recognize the tradeoffs involved in spending on government programs.

Introduction:

In this lesson students serve as an Economic Advisor to the President, who must increase military spending out of political necessity, but needs also to reduce spending in other programs to limit the deficit. Conflicting goals create a need for compromise and tradeoffs to create a national budget, while trying to remain under deficit limits.

The new President of the United States has been elected on the promise of fiscal responsibility. He has promised the voters he will not raise taxes, and he will not reduce Social Security or Medicare. He has promised interest groups that he will not reduce Commerce Department spending. By law he cannot reduce the net interest paid on the debt. The President's budget is projected to leave the country with a $230 billion surplus, and he promises not to allow a deficit, unless the U.S. faces a recession or war.

Suddenly, the United States is subject to military attack -- a turn of events not anticipated in the current budget. At the same time, a lingering recession reduces the government's tax revenues and forces the government to increase its spending on unemployment benefits, welfare, housing assistance, food stamps, and other need-based programs. Because of the increased spending and reduced revenues, the nation falls into a projected deficit of nearly $429 billion.

Then Congress passes legislation to increase military spending by 20 percent, to pay for increased security within the U.S. and to pay for a prolonged military response against the attacking country and other potential threats. The President signs this bill into law, increasing the projected deficit to nearly $530 billion.

The President is committed to keeping his campaign promises, in order to maintain support for his reelection. He must protect the programs he promised to protect, and he cannot raise taxes, so he must cut spending on other programs to stay within his new guideline to keep the deficit below $400 billion. The President turns to you, his trusted economic advisor, for help. (Note: While some events in this scenario reflect actual events, others are hypothetical for the purposes of this exercise. Budget figures are actual White House figures of 2005, including spending and revenues of 2005).

Resources:

•"The National Budget Simulation Worksheet": This worksheet is used as a tool that enables students to think about the choices they made when developing their national budget.
http://www.econedlink.org/lessons/docs_lessons/306_natlbudsimworksheet1.pdf

•"Fiscal Year 2003 Mid-Session Review": This Government Printing Office website is a report containing updated estimates of federal revenues and spending in the 2005 budget. These estimates were used to create the budget simulation. Receipts by Source are on page 53, and Outlays by Function are on page 57 of the report.
www.gpoaccess.gov/usbudget/fy03/pdf/msr.pdf

Process:

1. Follow this link to the NCEE National Budget Simulation.
2. To represent the 20 percent increase in military spending, the spending levels have automatically been changed. You can see how this affects the total spending at the bottom of the column.
3. Scroll to the bottom of the page to see the effect of the increase in military spending on the "New Surplus" or "New Deficit" (a negative surplus is a deficit). Remember that you need to get this figure below $400 billion. Make note of the relative amounts of the budget spent on each area listed in the table, so that you can decide where cuts might be effective to reduce the deficit.
4. Now begin cutting the program budgets as a tradeoff for the increased defense spending. Remember, for political reasons or by law, you cannot make any changes in these areas: Commerce and housing credit, Medicare, Social Security, Net interest, Allowances, and Undistributed offsetting receipts. You can click on the names of the spending areas to see the programs in the respective spending areas.
5. Keep cutting programs until you have reached your $400 billion deficit limit. Hint: You will have to cut most programs by at least 10 percent to reach your target. When cutting programs, keep in mind that program cuts could seriously affect citizens’ daily lives. Also keep in mind people who may be so angered by program cuts that they will take action to prevent the President’s reelection.

Note:

Some students will be tempted to quickly reach deficit limits by making extreme cuts or even eliminating entire programs. Encourage such students to consider the real-life ramifications of such cuts, and explain that even 10 percent cuts in many programs will have serious consequences.

Conclusion:

When the student(s) have reached their target have them print out their results. Have the students consider which programs they have cut, to help them answer the reflection questions on the Worksheet. When they are finished with the lesson, hand in the paper that you printed along with this worksheet.

Assessment Activity:

Students can be asked to write an explanation of the decisions they made and the justifications for those decisions. If several students have individually completed the activity, the class can discuss the decisions and justifications. Also have them hand in the printout of the "Your New Budget" page as a way to assess their decision-making skills in this activity.

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