Transcript Fiscal Policy, Deficits, and Debt

#8
Fiscal Policy, Deficits, and Debt
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Fiscal Policy
• Deliberate changes in
• Government spending
• Taxes
• Designed to
• Achieve full employment
• Control inflation
• Encourage economic growth
LO1
8-2
Expansionary Fiscal Policy
• Use during a recession
• Increase government spending
• Decrease taxes
• Combination of both
• Create a deficit
LO1
8-3
Expansionary Fiscal Policy
$5 billion
increase in
spending
Recessions
decrease AD
Price level
AS
Full $20 billion
increase in
aggregate demand
P1
AD1
AD2
$490
$510
Real GDP (billions)
LO1
8-4
Contractionary Fiscal Policy
• Use during demand-pull inflation
• Decrease government spending
• Increase taxes
• Combination of both
• Create a surplus
LO1
8-5
Contractionary Fiscal Policy
$3 billion initial
decrease in
spending
Price level
AS
P2
P1
d
c
Full $12 billion
decrease in
aggregate demand
b
a
AD4
AD
AD3 5
$502 $510
$522
Real GDP (billions)
LO1
8-6
Built-in Stability
• Automatic stabilizers
• Taxes vary directly with GDP
• Transfers vary inversely with GDP
• Reduces severity of business
•
LO2
fluctuations
Tax progressivity
• Progressive tax system
• Proportional tax system
• Regressive tax system
8-7
Built-in Stability
Government expenditures, G,
and tax revenues, T
T
Surplus
G
Deficit
GDP1 GDP2
GDP3
Real domestic output, GDP
LO2
8-8
Evaluating Fiscal Policy
• Is the fiscal policy. . .
• Expansionary?
• Neutral?
• Contractionary?
• Use the cyclically adjusted budget to
evaluate
LO3
8-9
Recent U.S. Fiscal Policy
Federal Deficits (-) and Surpluses (+) as Percentages of GDP, 2000–2010
(1)
Year
(2)
Actual Deficit –
or Surplus +
(3)
Cyclically Adjusted
Deficit – or Surplus +*
2000
+2.5
+1.0
2001
+1.3
+0.5
2002
-1.5
-1.3
2003
-3.4
-2.8
2004
-3.5
-3.3
2005
-2.6
-2.7
2006
-1.9
-2.2
2007
-1.2
-1.3
2008
-3.2
-2.9
2009
-9.4
-7.3
2010
-8.4
-6.1
•As a percentage of potential GDP
Source: Congressional Budget Office, www.cbo.gov.
LO3
8-10
Fiscal Policy: The Great Recession
• Financial market problems began in
•
•
•
LO4
2007
Credit market freeze
Pessimism spreads to the overall
economy
Recession officially began December
2007 and lasted 18 months
8-11
Budget Deficits and Projections
Budget deficit (-) or surplus, billions
$400
0
-400
-800
-1200
-1600
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
Source: Congressional Budget Office, www.cbo.gov.
LO4
8-12
Problems, Criticisms, & Complications
• Problems of timing
• Recognition lag
• Administrative lag
• Operational lag
• Political considerations
• Future policy reversals
• Offsetting state and local finance
• Crowding-out effect
LO4
8-13
Current Thinking on Fiscal Policy
• Let the Federal Reserve handle short•
•
•
LO4
term fluctuations
Fiscal policy should be evaluated in
terms of long-term effects
Use tax cuts to enhance work effort,
investment, and innovation
Use government spending on public
capital projects
8-14
The U.S. Public Debt
• $13.6 trillion in 2010
• The accumulation of years of
•
LO4
federal deficits and surpluses
Owed to the holders of U.S. securities
• Treasury bills
• Treasury notes
• Treasury bonds
• U.S. savings bonds
8-15
The U.S. Public Debt
U.S. Banks
and Other
Financial
Institutions
Other, including State
and Local Gov’ts
Federal Reserve
5%
13%
Debt held
outside
the federal
government
and the
Federal
Reserve:
61%
6%
U.S.
Government
Agencies
33%
Foreign
Ownership
32%
Debt held by
the federal
government
and the
Federal
Reserve:
39%
11%
U.S.
Individuals
LO4
8-16
The U.S. Public Debt
LO4
8-17
Global Snapshot
Public Sector Debt as
Percentage of GDP, 2010
0
20
40
60
80
100
120
Japan
Greece
Italy
Belgium
United States
Hungary
France
United Kingdom
Germany
Spain
Netherlands
Canada
Source: Organization for Economic Cooperation and Development, OECD
LO4
8-18
The U.S. Public Debt
• Interest charges on debt
• Largest burden of the debt
• 1.4 percent of GDP in 2010
• False Concerns
• Bankruptcy
• Refinancing
• Taxation
• Burdening future generations
LO4
8-19
Substantive Issues
• Income distribution
• Incentives
• Foreign-owned public debt
• Crowding-out effect revisited
• Future generations
• Public investment
LO4
8-20
Crowding-Out Effect
Real interest rate (percent)
16
14
12
b
10
8
a
6
Crowding-out
effect
4
ID2
2
ID1
0
LO4
c
Increase in
investment
demand
5
10 15 20 25 30 35
Investment (billions of dollars)
40
8-21
Social Security Shortfalls
• More Americans will be receiving
•
LO5
benefits as they age
Social Security shortfalls
• Income during retirement
• Funds will be depleted by 2036
8-22
Social Security Shortfalls
LO5
8-23
Social Security Shortfalls
• Possible options “to fix” include
• Increasing the retirement age
• Increasing the portion of earnings
subject to the Social Security tax
• Disqualifying wealthy individuals
• Redirecting low-skilled immigrants to
higher-skilled, higher-paying work
• Defined contribution plans owned by
individuals
LO5
8-24