Download INVESTING

DEFICITS AND DEBT
DEFINITIONS
DEFICIT – ANNUAL AMOUNT THAT
GOVERNMENT BORROWS (SIMILAR TO
WHAT PUT ON CREDIT CARD IN A YEAR)
DEBT – TOTAL AMOUNT OF
BORROWING OVER ALL YEARS THAT’S
NOT BEEN REPAID (SIMILAR TO CREDIT
CARD BALANCE)
MEASUREMENT
BEST MEASURED AS A % OF GDP
HERE – ANNUAL DEFICIT AS A %
OF GDP
HIGHEST DURING WAR PERIODS
TRENDS IN RELATIVE SIZE OF DEBT
REDUCED RELATIVE SIZE OF
DEBT AFTER WORLD WAR II
HOWEVER, SINCE MID 1980S,
RELATIVE SIZE HAS INCREASED
TRENDS IN FEDERAL BORROWING
IS GOVERNMENT BORROWING BAD?
BORROWING IS A WAY TO MATCH
USERS WITH PAYMENT
APPLIES TO LONG-LASTING
GOVERNMENT PROJECTS
* ROADS, BRIDGES, PUBLIC
BUILDINGS
* MILITARY HARDWARE
TAXPAYERS WHO USE THE PROJECT
PAY FOR IT
BUT LESS DEFENSIBLE IF USED TO
FINANCE CURRENT CONSUMPTION
COSTS OF TOO MUCH BORROWING
SAME AS FOR AN INDIVIDUAL HOUSEHOLD
OR BUSINESS
AS DEBT RISES, MORE MUST BE SPENT ON
INTEREST ON THE DEBT
MEANS LESS MONEY AVAILABLE TO BE
SPENT ON OTHER THINGS (OPPORTUNITY
COST)
IS THERE A POINT AT WHICH THE DEBT
BECOMES TOO COSTLY?
SOURCE OF INTENSE RESEARCH
BY ECONOMISTS
ANSWER: WHEN DEBT TO GDP
RATIO ENTERS THE 85% TO 100%
RANGE - THEN REDUCES
ECONOMIC GROWTH RATE OF
THE COUNTRY
CALLED “TIPPING POINT”
OPERATING VS. CAPITAL BUDGET
WOULD PREFER TO DIVIDE THE FEDERAL
BUDGET INTO TWO PARTS
OPERATING – FOR DAY TO DAY
EXPENDITURE; MUST BE BALANCED
CAPITAL- FOR LONG-LASTING PROJECTS;
BORROWING CAN BE USED
BUSINESSES AND STATE/LOCAL
GOVERNMENTS USE
OTHER RECOMMENDATIONS TO CONTROL
GOVERNMENT BORROWING
REQUIRED BALANCED BUDGET
RESTRICTIONS ON GROWTH OF
SPENDING (POPULATION GROWTH +
SOME REAL GROWTH)
RESTRICT SPENDING AND TAXES TO A
CERTAIN % OF GDP
POTENTIAL FIXES
SPENDING:
SLOW GROWTH OF BIG
ENTITLEMENT PROGRAMS
(“MEANS TEST”)
TAXES:
REDUCE DEDUCTIONS/CREDITS
MAKE INCOME TAX MORE
PROGRESSIV