Transcript Deficits, Surpluses, and the National Debt

Deficits, Surpluses, and the National Debt
Please listen to the audio as you work through the slides
Deficits, Surpluses, and the National Debt
Learning Objectives:
Students will be able to thoroughly and completely explain:
1. The 3 federal budget philosophies,
2. The composition, size, and evolution of the national debt.
3. Issues associated with paying off the national debt.
Deficits, Surpluses, and the National Debt
Definitions:
•Federal Budget
•Budget Deficit – spending > revenues
•Budget Surplus – revenues > spending
National or Public Debt:
The total accumulation of deficits (minus
surpluses) the federal government
has incurred over time. More specifically – the
outstanding government bonds (securities).
•U.S. Securities are:
•Treasury bills, treasury notes, Treasury bonds, US
savings bonds.
Deficits, Surpluses, and the National Debt
Budget Philosophies
1. Annually Balanced Budget
Favored by fiscal conservatives who want smaller
public sector
•Problems:
•Incompatible with govt. fiscal policy activity
•Intensifies the business cycle
•Recession – tax revenue automatically fall
•Inflation – tax revenue automatically rises
•To balance budget with recession –
•Increase tax rates
•Reduce govt. spending, or
•Both
•All of which are contractionary and intensifies the
recession
Deficits, Surpluses, and the National Debt
Budget Philosophies
2. Cyclically Balanced Budget
Govt. can exert countercyclical influence and balance the
budget.
Balance budget over a business cycle rather than annually.
During recession, run deficit
During inflation, run surplus
Budget balanced over the business cycle.
Problem:
upswings and downswings are not equal.
when cycles start and end is unclear.
Deficits, Surpluses, and the National Debt
Budget Philosophies
3. Functional finance
Primary goal –
Provide non-inflationary full employment to
balance the economy.
Use the budget to manage the economy.
The National Debt
Causes:
• Wars – selling of bonds
• Recessions – deficit financing due to decreased revenues
• Lack of Fiscal Discipline – congress, all of us.
Quantitative Aspects
• Debt and GDP – debt as a % of GDP (a key indicator)
•What happens when your credit card bill equals your pay
check?
• Interest Charges – paid by tax revenue or refinance
• Ownership –
•The public (domestic and foreign)
•Federal agencies
The National Debt
Social Security Considerations
• Social Security Trust Fund
•Surplus invested in US securities
Included in public dept computation, which
makes the debt appear smaller than it really is.
The National Debt
False concerns
• Bankruptcy – not really an issue
Due to:
• Refinancing – issue new securities to fund
payoff of those that come due.
• Taxation – govt. can increase taxes to finance
the debt.
The National Debt
False concerns
Burdening Future Generations
- The portion owed to Americans could be
paid off with a massive income transfer.
- Taxpayers would pay more and US
securities holders would be paid.
The National Debt
False concerns
Burdening Future Generations
- The 30% owned by foreigners
would impact our economy.
Substantive Issues
Income Distribution
• Ownership of US securities is unevenly
distributed.
• Interest payments increase income inequality.
Incentives
•
Higher taxes to pay the interest on the dept
may discourage innovation, investment.
Substantive Issues
Foreign-Owned Public Debt
External Public Debt – debt owned by
foreigners is income to them. They can use
that money to purchase goods from the US.
Substantive Issues
• Crowding Out and the Stock of Capital
•Higher public debt leads to higher real
interest rates which reduces private
investment spending.
•Public Investment – increase the economy’s
future production capacity.
•May offset the crowding out effect.
•Public-Private complementarities
Some Options for Surpluses
• Pay Down the Public Debt
• Cut Taxes
• Increase Federal Expenditures
• Back to Deficits in 2002
• Bush Tax Cuts of 2001
• The Economic Downturn
• September 11, 2001
• Tax Cuts of 2003
public debt
U.S. Securities
annually balanced budget
cyclically balanced budget
functional finance
Social Security trust fund
external public debt
public investments