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Funding Economic Development

Funding Economic Development

Assume that people push the government to invest more in infrastructure. After some time, the government agrees to meet the demand of its citizens, and allocates a massive budget to building the infrastructure across the nation. Is it a wise decision to make? Where does the government get the money from? And most importantly, does this funding for economic development actually provide growth? You'll learn the answers to these questions and much more once you get to the bottom of this article!

Funding Economic Development Meaning

What is the meaning of economic development funding? Economic development entails programs, policies, and actions that strive to enhance a community's economic well-being and quality of life.

Funding economic development refers to the numerous programs, typically created and managed by some level of government, intended to boost economic productivity, employment, and quality of living for low-income individuals.

Economic development includes macroeconomic efforts to improve local, regional, or national income levels and government services. Since the 1930s, economic growth has become a common goal and activity of most industrialized nations.

It is typically accomplished through fiscal policies (government taxing and spending policies) that redistribute income from areas of high income and little need for government services to areas of low income and a more increased demand for government services.

Some of the funding for economic development is used through various strategies. All these strategies strive for the same kinds of beneficial outcomes, including the following:

  • Increasing the number of jobs as well as the type of occupations
  • Retaining existing companies while also seeking out new ones. Funding for businesses and the number of jobs is done to lower unemployment and contribute towards higher economic development.
  • Funding economic development also entails programs that aim to increase and provide a higher general standard of living.
  • These economic programs also include helping local producers increase their sales and the number of goods and services produced. This is especially true in less developed areas requiring the government's attention to help expand their local economies.

Economic Development Funding Sources

Let's dive into the economic development funding sources. Because economic development programs are typically related to fiscal policy rather than monetary policy, any source of tax revenue can become a source of economic development funding.

Funding Economic Development Economic development funding StudySmarterEconomic development funding, pixabay

Fiscal policy refers to the government's use of its expenditure and taxes to influence economic activity.

Monetary policy refers to the control by the Federal Reserve of the number of money circulating in an economy

We have detailed explanations covering Fiscal Policy and Monetary Policy. Check them out!

The government can then use this revenue to engage in economic development programs, such as building infrastructure, hiring individuals to work government jobs, or subsidizing (providing money to assist) private businesses that will employ out-of-work individuals.

Economic development programs at the sub-national level (local, state, or regional) may be funded by grants provided by the federal government. State and local programs may also be financed by sales taxes and property taxes that contribute to the overall state and local government budgets.

Check out the explanation on State Government Revenue Sources for more information!

The government also uses gasoline taxes to fund highways. Gasoline taxes are part of state and national infrastructure and can be tools for economic development when they direct traffic to businesses in lower-income areas.

Highways can also contribute to economic development programs through tolls paid by users and fines from those caught breaking ordinances. Funds generated by tollways and fines can be directed to further infrastructure programs.

Local governments can sell bonds to investors to borrow money for infrastructure development, with the bonds paid back over time using sales tax, property tax, or fee-for-use revenue. Frequently, this new infrastructure is at least partially intended to develop a struggling area of the city economically.

An example would be building new city parks, pools, and public libraries in low-income areas to draw in users from wealthier regions. While visiting the park, pool, library, or other public venues, these visitors from more affluent areas will spend money at local businesses like restaurants.

All levels of government can also promote economic development through tax credits.

Tax credit refers to the sum that can be offset against a tax liability.

Private businesses can receive tax credits, which reduce their taxes owed, if they build operations in low-income areas, hire unemployed citizens, or assist with infrastructure development.

Role of Economic Funding in Development

The role of economic funding in development is significant. The funds raised through various sources such as government tax revenue or bonds (purchased by private investors) are primarily taken from higher-income individuals and redistributed to lower-income individuals through government services.

These government services can include direct wealth and income redistribution through welfare programs that allow money to be spent at local businesses in low-income areas or indirect redistribution through government services and venues that are free or below market price.

Examples include public schools, public transportation, parks, libraries, public pools, and sports complexes. Low-income individuals may receive free passes or vouchers to use these services at no cost. These venues and services may be more frequently located in low-income areas to assist local businesses.

Such funding is crucial because it helps local businesses develop further, hiring more people and generating more goods and services. More income for families means more consumption takes place in the economy, providing opportunities for further development.

Federal Funding Economic Development Program for Needy Families

Federal funding for an economic development program for needy families is another way of funding economic development.

Today, needy families do not directly receive cash assistance from the federal government, except for additional tax deductions that can lead to larger tax refunds.

However, federal grant programs do exist to support needy families and local businesses.

A grant refers to monetary funds given by the federal government to businesses and ideas to stimulate economic growth

The federal government also gives states large block grants to fund welfare programs, such as food stamps and Medicaid (medical insurance for low-income individuals).

SNAP (Supplemental Nutrition Assistance Program) is the most recent iteration of the former “food stamp” program. It is fully funded by the federal government but administered by each state individually.

Economic development for needy families can arguably come from federal student aid, which provides grants and student loans to college students. Federal student aid depends on family income, so more is available to college students from needy families.

The Pell Grant is a federal grant to low-income college students that is available for up to six years of higher education. As a grant, it does not need to be repaid.

This education assistance can be seen as economic development because college graduates from needy families will be more likely to economically stimulate their (or their families’) low-income neighborhoods through entrepreneurship and higher spending.

First Nation Economic Development Funding

First nation economic development funding helps indigenous entrepreneurs, businesses, communities, and organizations by providing monetary funds.

Federally-recognized Native American tribes are allowed to have their own reservations that are sovereign within each state. Thus, reservations are effectively independent of state law and are only bound by federal law.

First Nations comprises some 567 tribal entities recognized by the U.S. Bureau of Indian Affairs (BIA).1 Both nonprofit and government grant resources are available to Native Americans and reservations to pursue economic development.

In addition to grants, federally-recognized tribes are allowed to conduct gaming (casinos), even in states that do not qualify for legalized gambling. Tribes-built casinos typically reserve the profits in a wealth fund that helps provide economic development and social welfare.

Community and Regional Economic Development Funding

Community and regional economic development funding refer to the financing of economic development at the local level.

At the local level, economic development funding can come from several sources.

Infrastructure development and municipal (city) services are typically funded through the local component of sales tax and the various property taxes that are levied on residential and commercial property.

In most states, local property taxing entities include the county, city or town, school district, hospital district, and community college district. These separate taxing entities can engage in economic development by building new infrastructure, which usually involves hiring local companies to conduct the work.

Employees at these taxing entities also spend a portion of their paychecks at local businesses. Thus, raising property or sales taxes to expand the operations of a local government entity usually results in some economic development due to increased spending.

State and regional economic development are more commonly funded by sales tax. States have a base sales tax rate levied on all non-essential purchases, and local governments (by city or county) may add a certain amount onto this base. Most states also conduct lotteries, with most ticket revenue going to state government programs like roads, public education, and state veterans’ services.

Among multiple states in a region of the United States, such as the Southwest, Midwest, Northeast, etc., states can work together on large infrastructure projects, and each spends a share of their respective tax revenue.

Typically, however, regional projects involve lots of federal grants. Some regions have characteristics that are targeted by federal agencies, such as being highly forested (U.S. Forest Service) or being mostly rural (U.S. Department of Agriculture). Specific economic development programs exist for rural and agricultural areas. The U.S. Economic Development Administration has a regional structure and helps state and local governments collaborate with partners for more wide-scale economic development projects.

Funding Economic Development - Key takeaways

  • Economic development entails programs, policies, and actions that strive to enhance a community's economic well-being and quality of life.
  • Funding economic development refers to the numerous programs, typically created and managed by some level of government, intended to boost the economy.
  • Because economic development programs are typically related to fiscal policy any source of tax revenue can become a source of economic development funding.
  • Community and regional economic development funding refer to the financing of economic development at the local level.
  • First nation economic development funding helps indigenous entrepreneurs, businesses, communities, and organizations by providing monetary funds.

References

  1. National Conference of State Legislatures, Federal and State Recognized Tribes, https://www.ncsl.org/legislators-staff/legislators/quad-caucus/list-of-federal-and-state-recognized-tribes.aspx

Frequently Asked Questions about Funding Economic Development

It refers to monetary funds given by the federal government to businesses and ideas to stimulate economic growth.

Main source comes from tax revenue.

By fiscal policy rather than monetary policy.

Rural and urban areas that are less developed.

It boost economic growth.

Final Funding Economic Development Quiz

Question

Explain economic development

Show answer

Answer

Economic development entails programs, policies, and actions that strive to enhance a community's economic well-being and quality of life.

Show question

Question

Explain funding economic development.

Show answer

Answer

Funding economic development refers to the numerous programs, typically created and managed by some level of government, intended to boost economic productivity, employment, and quality of living for low-income individuals.

Show question

Question

Is it fiscal policy or monetary policy that funds economic growth?

Show answer

Answer

It is typically accomplished through fiscal policies.

Show question

Question

Define fiscal policy.

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Answer

Fiscal policy refers to the government's use of its expenditure and taxes to influence economic activity.

Show question

Question

Define monetary policy.

Show answer

Answer

Monetary policy refers to the control by the Federal Reserve of the amount of money circulating in an economy

Show question

Question

Why tax revenue is one of the main sources of funding economic development?

Show answer

Answer

Because economic development programs are typically related to fiscal policy rather than monetary policy, any source of tax revenue can become a source of economic development funding.  

Show question

Question

What are some of the economic development programs the government can fund?

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Answer

Building infrastructure, hiring individuals to work government jobs, or subsidizing (providing money to assist) private businesses that will employ out-of-work individuals.  

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Question

What is the source of funding for economic development programs at a national level?


Show answer

Answer

Grants provided by the federal government.

Show question

Question

What are some sources of funding for economic development?

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Answer

  • grants
  • sales taxes
  • property taxes
  • gasoline taxes
  • bonds 

Show question

Question

What are tax credits?

Show answer

Answer

Tax credit refers to the sum that can be offset against a tax liability.

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Question

Are tax credit a way of funding economic development?

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Answer

Yes.

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Question

What is the role of economic funding in development?

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Answer

Such funding is crucial because it helps local businesses develop further, hiring more people and generating more goods and services. More income for families means more consumption takes place in the economy, providing opportunities for further development.

Show question

Question

What is a grant?

Show answer

Answer

A grant refers to monetary funds given to businesses and ideas to stimulate economic growth by the federal government.

Show question

Question

What is first nation economic development funding?

Show answer

Answer

First nation economic development funding helps indigenous entrepreneurs, businesses, communities, and organizations by providing monetary funds.

Show question

Question

Give an example of federal funding for an economic development program for needy families.

Show answer

Answer

The Pell Grant is a federal grant to low-income college students that is available for up to six years of higher education. As a grant, it does not need to be repaid. 

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