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Deficits, Surpluses, and
the National Debt
From Deficits to Debt
• Because of deficit spending, the
national debt has increased
dramatically.
• Typically, deficit spending is a
result of the government forced to
spend more than it collects because of
unexpected developments causing a
drop in revenues or a rise in
expenditures.
From Deficits to Debt
• When the federal government runs a
deficit, it must finance the revenue
shortage by selling U.S. Treasury
notes and other securities to the
public.
• The national debt is equal to all
outstanding federal notes, bonds, and
other debt obligations.
• A balanced budget does not change
the national debt.
From Deficits to Debt
• A portion of the national debt is
money the government owes itself as
in trust funds.
• Two alternative views of the total
national debt
▫ Debt as a percentage of GDP
▫ National debt computed on a per
capita basis
From Deficits to Debt
•Differences between public and
private debt
▫ Country can never go bankrupt—
most of debt is owed to itself.
▫ Repayment—new bonds are issued
to pay off old bonds.
▫ Little purchasing power is given up.
Impact of the National Debt
• The national debt affects the distribution of
income and transfers purchasing power
from the private to the public sector.
• The national debt, although mostly owed to
ourselves, still affects the economy by
▫ Transferring purchasing power from private sector to
public sector
▫ Reducing economic incentives
▫ Causing a crowding-out effect
▫ Redistributing income
Reducing the Deficits and Debt
• Congress has tried a number of
measures to reduce deficits and the
national debt.
• Concern over deficit spending led to attempts
to control it.
▫ Congress mandated a balanced budget.
▫ “Pay-as-you-go” provision
▫ Line-item veto and spending caps
▫ Raising revenues
▫ Reduced spending—difficult because of
entitlements
Reducing the Deficits and Debt
• Action to reduce budget deficits and the
national debt will depend on the willpower
of Congress to make unpopular and
difficult choices.