Download What is a federal deficit?

•The federal budget process
•Problems with the process
•Rationale for deficits
•The historical records
•The national debt
•Interest on the national debt
•Who does the federal government
owe?
•The ‘crowding out’ view
•The intergenerational view
Revenue and appropriations bills
start in the House Ways and
Means Committee. The federal
fiscal year runs from October 1
to September 30.
1. Continuing resolutions
2. Uncontrollable budget items such as
entitlements and interest on the
national debt.
3. No separate capital budget
About three-fourths of
federal spending in each fiscal
year is determined by existing
law
Federal outlays since 1960
• Defense’s share of federal outlays declined
since 1960 and redistribution increased
5
If federal outlays exceed (net)
tax receipts in a fiscal year,
then we have a federal deficit
G
Remember that
government
expenditures are
an injection and
net taxes are a
leakage
Real GDP
NT
Many economists believe the federal
government budget should be
roughly balanced when the economy
is a full-employment.
G, NT
Budget is structurally-balanced at
full-employment
NT
G
Deficit
0
Y
YF
Real GDP
The Congressional Budget Office Now Projects the Federal Deficit for
fiscal year 2008 at $475 billion.
After decades of federal budget deficits, surpluses
appeared from 1998 to 2001, but deficits are back
11
During the 1990s, federal outlays declined relative to
GDP and revenues increased, turning deficits into
surpluses, but not for long
12
Government outlays as a percentage of GDP
declined between 1994 and 2007 in most
major economies
13
In the case of a federal deficit, the
Treasury must borrow. The national debt
is the accumulated borrowing of the
federal government in all previous
fiscal years, minus what has been repaid
For updated information, check the National Debt Clock
Is a large national debt a bad thing?
Arguments against a large national debt include:
•The “burden on future generations” argument.
•A large national debt means that a significant
share of federal spending must be allocated for
interest payments—leaving less for other priorities.
•A large national debt makes the U.S. too
dependent on foreign financial inflows.
•Federal borrowing “crowds out” private sector
borrowing units—i.e., firms and households.
“[W]e (the U.S.) owe
$5.7 trillion in debt and if we
don’t pay it off, our children
and our grandchildren are
going to have to.”
Congressman Marion Berry, in a
speech to the Jonesboro Lions
Club on April 16, 2001.
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Interest payments as a Percent of Federal Expenditures
(Annual)
16
14
P
e
r
c
e
n
t
12
10
8
6
4
2
0
1965
1970
1975
www.economagic.com
1980
1985
Year
1990
1995
2000
As long as the debt grows by the same
percentage as nominal GDP, the ratios of debt to
GDP will remain constant. In this case, the
government can continue to pay interest on its
rising debt without increasing the average tax
rate in the economy.
Click image below to enlarge.
National Debt Graph (2007 Budget data)
Relative to GDP, US net public debt in 2007
was about average for major economies
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Who Owns the National Debt?
Agencies and Trusts
1814 / 26%
Privately Owned
3342 / 48%
Foreign Inves tors
1271 / 18%
Fed. Reserve Banks
463 / 7%
Source: Federal Reserve
Largest foreign holders of US treasury securities as of
June 2007 (in billions and as percent of foreign held)
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