Download Deficit, Surpluses, and the Public Debt

Deficit, Surpluses, and the
Public Debt
Chapter 18
Basic definitions
 Budget Deficit – Amount which
expenditures exceed revenues in a
particular year
 Budget Surplus – Amount which revenues
exceed expenditures in a calendar year
 National Debt – Total accumulation of
deficits and surpluses over time
3 Approaches to the Budget
 1. Actually balance it. Until 1930, the goal
was to achieve a balanced budget. As
we’ve learned however, the best way to
counteract a recession is to reduce taxes
and increase government spending. This
only makes it more difficult to balance the
budget and would almost always increase
deficits.
Approaches to the Budget
 2. Adapting from the first method the
government will then try and balance the
budget cyclically. In other words, spending
during a recession could be counteracted
by saving during inflationary periods or
economic booms. In reality though ,
surpluses and deficits will not equally
offset.
Approaches to the Budget
 3. Functional Finance. Advocates argue
that the budget is secondary to the real
goals of the FED (Controlling inflation and
promoting full employment). Balancing the
budget should take a back seat to
stimulating the economy.
Facts & Figures of National Debt
 14 Trillion and climbing
 Financing the military, economic
recession, health care, and tax cuts all
assist in increasing the debt.
 Debt size though must be examined in
comparison to GDP or the ability to pay.
Currently, our GDP barely exceeds our
debt.
Facts & Figures of National Debt
 Relative comparisons show US debt to
GDP ratios similar to those of other
countries.
 Annual interest payments on bonds sold to
finance the debt remain the primary
burden of the national debt.
 Debt ownership – 37% The FED & other
government agencies , 63% private. Of
that 63%, 25% is held by foreign investors.
Debt Misconceptions
 The Federal Government has little or no
chance of ever going bankrupt. First, we
can always sell bonds on the open market.
Second, we can always raise taxes.
 Any issues with this?
Future Generations
 Fortunately, the majority of our debt is
owned by Americans. When we make
interest payments on it, the money stays
with Americans. Increased foreign
purchase of our debt will drastically could
result in higher taxes and a decline in
GDP.
Real Problems of National Debt
 Income redistribution from the repayment
of bonds
 Higher interest rates on bonds which could
increase tax rates and hinder growth
 Foreign investment although Americans
also own foreign bonds which offsets this
Recent Activity
 1993 - Deficit Reduction Act
 Raised top marginal rate from 31 to 39.6%
 Corporate taxes raised 1%
 Gasoline excise tax raised 4.3 cents per
gallon.
 No spending increases
 Budget balanced by 1998
The Path to Destruction
 Your text actually projects billions in
surplus in the first decade of the 21st
century. It simply could not have predicted
9/11, 2 foreign wars, 1.5 trillion in bank
bailouts topped off with a number of tax
cuts. CBO estimates have us @ 20 trillion
in debt by 2020.