Download PPT 2 - Deficits, Surpluses, and the Public Debt

Chapter 18
Deficits, Surpluses, and the Public
Debt
Definitions of Deficit, Surplus, and Debt
• Budget Deficit – The amount by which
government’s expenditures exceed its
revenues during a particular year.
• In contrast, a surplus is the amount by
which its revenues exceed expenditures.
Definitions of Deficit, Surplus, and Debt
• In 2002 there was a Federal deficit of $158
billion
• In 2000 there was a surplus of $236 billion
• The national or public debt is the total
accumulation of the Federal government’s
total deficits and surpluses that have
occurred through time.
Definitions of Deficit, Surplus, and Debt
• State and local governments historically
have a collective budget surplus
Three Budget Philosophies
• Annually Balanced Budget – Was the goal until the 1930s
Depression, but this ruled out using fiscal policy as a
countercyclical, stabilizing force and even makes recession
or depression worse
• The balanced budget is not neutral, but is procyclical – it
worsens the business cycle
• In a recession, the government would have to arise taxes
and lower spending to balance the budget as tax revenues
fell with recessionary income levels – This policy would
worsen recessions
Annually Balanced Budget
• In an inflationary boom period, a balanced
budget would intensify the inflation - As
tax revenues increased, the government
would need to cut taxes or increase
spending to avoid budget surplus. This
strategy would make the inflation worse.
• Those who argue for the annually balanced
budget want to limit the growth of
government.
Three Budget Philosophies
• Cyclically balanced budget – Allows for some
government stabilization policy over the
length of the business cycle. Deficit spending
is allowed during a recession, and surpluses
during an inflationary period.
• Over the business cycle, deficits would be
offset by surpluses.
• But in reality, surpluses and deficits do not
offset each other.
Three Budget Philosophies
• Functional Finance – Advocate contend that
deficits, surpluses, and the size of the debt
are of minor importance
• The primary purpose of Federal finance is to
achieve noninflationary full employment.
• Government should do what is necessary to
achieve this goal regardless of the deficit or
surplus in the budget.
The Public debt
• Any government deficit increases the size of
the public debt.
• The public debt has grown substantially since
1940
Three causes of the debt:
• Wars require increased Federal borrowing to
finance the war effort
• Recessions result in budget deficits because
of the built-in stability of the economy (tax
revenues fall and domestic spending rises).
• Lack of fiscal discipline, such as a cut in tax
rates without offsetting reductions in
expenditures or a lack of control over
increased spending, will contribute to deficits.
The Social Security Trust Fund
• Currently generates more revenue than
expenditures for the federal government. This
situation decreases budget deficits and
increased budget surpluses.
• If we do nothing to Social Security program
right now, Social Security can pay every cent it
owes to 2036. after 2036, can only pay about
70% (2010)