You are the Economic Advisor to the President. Military spending out of political necessity must be increased, but there must be reductions in 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 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. So in keeping with the President’s objectives, his
original budget proposal is projected to leave the country with a $525 billion budget deficit, meeting his pledge not to allow the budget deficit to be more than 3.5% of real 1st quarter 2012 GDP,
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 $1.09 trillion.
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 $1.226 trillion.
The President is committed to keeping his campaign promises as best as he can, 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 $1.075 trillion. The President turns to you, his trusted economic advisor, for
1. Follow this link to the CEE 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 $1.075 trillion. 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
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
5. Keep cutting programs until you have reached your $1.075 trillion deficit limit. Hint: You will have to cut your discretionary programs by an average of 10% 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.
Therefore, you only need to use the CEE National Budget Simulation link within the assignment itself and the downloadable assignment document titled National Budget Simulation Worksheet.doc. You
will not need to use the link entitled; National Budget Simulation Website.