Download 2 - Spring Branch ISD

Deficits, Surpluses and the Public Debt
Public debt – is the total accumulation of each
years deficits (minus surpluses) the Federal
government has incurred through time.
•The Federal budget deficit is found by
subtracting government tax revenues from
government spending in a particular year.
•The public debt is held as Treasury
bills, Treasury notes,
Treasury bonds, and
U.S. savings bonds.
Factors that cause public debt
• War; during wars government expenditures
increase. Three options are available to finance the
spending:
-Increase taxes, which would hurt the incentive to
work.
-Print money, which would cause high inflation.
-Borrow the funds
• Recessions; when national incomes decline, tax
revenues decline.
• Tax Cuts; tax cuts account for much of the
growing debt since 1980, and Congress failed to cut
spending.
Understanding the National
Debt:
• Some economists argue that the debt although
big is nothing to worry about.
1. Debt to GDP ratio; a wealthy, highly
productive nation can incur and carry a large
public debt more easily than a poor nation can.
It is more meaningful to measure the national
debt in relation to our GDP.
Although the U.S. has the world’s largest public
debt, a number of other nations have larger debts as
percentage of their GDPs, and they are fine.
Japan
Italy
Belgium
Canada
France
Spain
Sweden
Germany
United States
Netherlands
United Kingdom
Finland
Denmark
Australia
0
20
40
60
80
100
120
140
Source: Organization for Economic Cooperation and Development
171.0
2013
17000.0
17,000.0
383.0
100%
37%
39,800
Understanding the National
Debt:
2. Interest payments; the primary burden of
the debt is the annual interest charged on the
debt. This interest must be paid each year and
thus leaks budgetary funds that could go to other
programs. Interest payments are now the fourthlargest item in the Federal budget.
• However, since 75% of the debt is owed to
Americans, that interest goes to us, and is
consumed.
PUBLIC DEBT OWNERSHIP, 2004
Debt held
U.S. Banks & Financial Other, Including
Outside the Institutions
State & Local Governments
Federal
Reserve &
Federal Reserve
Government
Agencies
17%
11%
Foreigners hold $3.5 Tril.
10%
Japan-$751 B, China-$799 B,
Britain-$249 B, OPEC-$185 B,
S. Korea-$39 B, H. Kong –$132 B,
Taiwan-$78 B, Mexico-$22 B,
Thailand-$30 B, & India-$36 B.
China holds 23% of our foreign
debt
U.S.
Government
Agencies
25%
26%
11%
Foreign
Ownership
U.S. Individuals
Debt held
By Federal
Reserve &
Government
Agencies
False Concerns about the
debt
1. Bankruptcy; the Federal government will
not go bankrupt for two good reasons.
• Print Money; the government can print
paper to buy back its bonds (paper).
• Taxation; the government can increase
taxes to pay interest payments or the
principle of the public debt.
•Refinancing; the government refinances
the debt by selling new bonds to pay off
maturing bonds.
False Concerns about the
debt
2. Burdening Future Generations; the
debt is not a future burden. Since 75% of the debt is
owned by American citizens, it is a liability to Americans
(as taxpayers) and an asset to Americans (as investors).
By paying off the debt we would just be transferring
money from Americans to Americans.
• Only the foreign owned portion of the debt would
negatively impact U.S. purchasing power.
Real Concerns about the
debt
1. Income distribution; most of the
ownership of the public debt is concentrated
among the wealthier Americans who are the
citizens that buy stocks and bonds.
• Thus paying off the debt would transfer income
from lower income taxpayers to higher income
people, increasing the nation’s income
inequalities.
Real Concerns about the
debt.
2. Incentives; large debt hurts economic
growth. As the debt grows, the interest paid on it
will grow. Government spending must be cut or
taxes must increase to pay that interest. Either
action will dampen economic growth.
Real Concerns about the
debt.
3. Foreign-Owned Public Debt; interest
payments to debt owners outside the U.S. enables
foreigners to buy some of our economic output.
Thus the U.S. transfers goods and services to
foreign lenders.
Real Concerns about the Debt
AS
4. A large public debt
results in higher interest
rates, which reduce Ig.
16
AD1
AD2
14
4%
12
IG
Y
10
Real interest rate (%)
2%
8
The most likely
way the public debt 6
burdens future
4
generations, if at
2
all, is by reducing
the current level of 0
investment.
Crowding
Out
Effect
5
10
DI
15
20
25
30
35
Investment (billions of dollars)
40
Budget Philosophies
“Earth Orbits Sun”
“G”
1. Annually Balanced Budget –Fiscal
conservatives favor an annually balanced budget primarily
because they believe deficit financing leads to an undesirable
expansion of the public sector of the economy.
•A balanced budget amendment would require decreased
G or increased T in recessionary periods.
•If government adhered strictly to an annually balanced budget,
the government's budget would intensify the business cycle.
Tax
Cuts
Inflation
“Raise taxes”
Raise
Taxes
“Balanced”
Recession “Deficit Spending”
“Tax cut”
2. Cyclically Balanced Budget – run deficits in
recessions & surpluses during expansions so the budget is
balanced not each year but over the course of the business
cycle. The government could conduct counter-cyclical fiscal
policy and balance its budget over a period of years. A major
criticism of a cyclically balanced budget is that upswings and
downswings of the business cycle are not always of equal
magnitude and duration.
U.S.
Economy
3. Functional Finance – balance the economy not the
budget. It views the public budget primarily as a way to
Stabilize the economy. The important thing is to provide for
non-inflationary, FE & ensure the economy produces its
potential GDP. If there are chronic deficits or surpluses, so be
it. Deficits are minor problems, compared to inflation or
recessions.