Transcript The Government Budget Deficit: Prospects and Implications

The Government Budget:
Prospects and Implications
Andrew B. Abel
March 8, 1999
National Saving and Wealth
• Income Statement Concepts
• Output: Y = C + I + G + NX
• National Saving: S = Y - C - G = I + NX
• Balance Sheet Concept
• National Wealth = domestic capital stock + net
foreign assets
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Link Between Balance Sheet and
Income Statement
• National Saving = Growth of National Wealth
• S = I + NX
• I = growth of domestic capital stock
• NX = growth of net foreign assets
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Capital Gains and Saving
• Capital gain for an individual
• Increases current income
• If not spent:
• Increases current saving
• Increases wealth at end of year
• Capital gain can increase current and/or
future consumption of individual
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Capital Gain in Closed Economy:
National Perspective
• S=I
• If add capital gain to national output, Y
• S would increase
• Would have to add capital gain to I
• But I is intended to measure gross capital formation,
which affects capacity to produce and consume in
future
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Source of Capital Gains
Dividend
Asset price 
 bubble
rg
• Increase in dividend, current or future
• Reflects increase in current or future output
• Decrease in r
• Does not reflect increased current or future
output
• Bubble
• Unrelated to current or future output
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Capital Gains:
Individual vs. National
• Increase ability of individual to consume
• May not affect ability of nation to consume
• Example: Stock market bubble
• Increases wealth of individual owners
• Does not increase ability of nation as a whole to
consume
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U.S. National Saving, 1998-III
1998-III
Gross Private Saving
Personal
Business
Gross Government Saving
Federal saving
State and local saving
$billions % of GDP
1078.7
12.6
12.6
0.1
1066.1
12.5
$/person
3991
47
3944
395.7
161.6
234.1
4.6
1.9
2.7
1464
598
866
Total National Saving
1474.5
17.3
5455
Investment
Private
Federal
State and local
Current Account Balance
Investment + Current Account Balance
1604.2
1364.4
60.8
179.0
-231.6
1372.6
18.8
16.0
0.7
2.1
-2.7
16.1
5935
5048
225
662
-857
5078
Statistical Discrepancy
-102.0
-1.2
-377
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Gross Government Saving
1998-III
1998-III
Gross Government Saving
Federal saving
Receipts
Current expenditures
Current surplus
Consumption of fixed capital
State and local saving
Receipts
Current expenditures
Current surplus
Consumption of fixed capital
$billions
395.7
161.6
1858.8
1766.7
92.0
69.6
234.1
1152.3
1003.6
148.7
85.4
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Budget Outlook under Current Policies
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-1, p.
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Deficits and Debt in Europe
(percent of GDP)
General
Gross
General
Gross
Country
Government Government Country
Government Government
Deficit
Debt
Deficit
Debt
1996 1997 1996 1997
1996 1997 1996 1997
Germany
3.8
3.3
60.3 61.5 Austria
3.9
2.5
69.8 68.1
France
4.1
3.3
56.3 57.8 Denmark
1.6
0.1
69.9 67.3
Italy
6.8
3.3 123.0 121.5 Finland
2.6
1.9
58.0 58.7
UK
4.4
3.1
49.3 49.4 Greece
7.6
5.1 110.7 107.7
Spain
4.4
3.2
69.5 69.0 Portugal
4.0
2.9
70.8 69.2
Netherlands 2.3
2.2
78.8 76.1 Ireland
1.0
1.6
76.4 72.3
Belgium
3.4
2.9 130.0 127.1 Luxembourg 0.1
0.1
5.9
5.7
Sweden
2.5
0.8
78.6 76.6 Maastricht
3.0
60.0
criteria
Source: World Economic Outlook, International Monetary Fund, May 1997, Table 5, p. 27.
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Revenues as a Share of GDP
(fiscal year)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-2, p. 45.
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Revenues by Source
(fiscal year)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-3, p. 47
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Outlays
• Discretionary spending
• Annual appropriation
• Defense, education, transportation, ...
• Mandatory spending (Entitlements)
• Eligibility rules and benefit formulas
• Offsetting receipts
• e.g., drilling leases for Outer Continental Shelf
• Net interest
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Outlays
Discretionary Spending
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.
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Outlays
Entitlements and Other Mandatory Spending
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.
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Outlays
Net Interest
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.
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CBO Budget Projections
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii.
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CBO Budget Projections
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii.
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Measures of Fiscal Policy
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16.
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Measures of Fiscal Policy
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16.
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Projections of Federal Debt
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-3, p. 38.
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Trust Fund Surpluses
(fiscal year, billions of dollars)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-4, p. 41.
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Burden of the Debt
Gross Federal Debt
Debt Subject to Limit
Debt Held by the Public
billions
of dollars
5479
5439
3720
dollars per
capita
20,271
20,123
13,763
• Debt ceiling
• raised to $5500 billion in March 1996
• raised to $5950 billion in Balanced Budget Act of 1997
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Two Views of Burden of Debt
• “We Owe it to Ourselves” ==> No Burden
• $1759 billion held by gov’t is no burden
• $3720 billion held by public is owed to public
• but foreigners own some of this debt
• Burden, even if U.S. citizens owned all of debt
• Crowds out capital stock
• Reduces long-run wages and output per person
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Federal Interest Outlays
(Fiscal year, billions)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 4-8, p. 79.
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Debt-GDP Ratio in the U.S.
1.4
Ratio to GDP
1.2
1
0.8
0.6
0.4
0.2
0
1860
1880
1900
1920
1940
1960
1980
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Changes in Debt-GDP Ratio
• Debt-GDP Ratio:
B
GDP
• Growth of numerator: deficit
• Primary deficit + net interest
• Growth of denominator: nominal GDP
growth
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Factors Causing
Debt-GDP Ratio to Rise
• Large Primary Deficits (deficit minus interest)
• Wars
• Great Depression
• 1980s and first half of 1990s
• High (Real) Interest Rates
• Low GDP growth
• Great Depression
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Effect on Deficit of 1 Percentage
Point Reduction in Measured CPI
(fiscal years, billions of dollars)
D Revenues
D Outlays
Social Security
Debt Service
Other
D Total Outlays
D Deficit
1998
1.9
2000
10.5
2007
44.2
-2.8
-0.2
-0.9
-3.9
-5.8
-10.7
-2.0
-4.5
-17.2
-27.7
-44.6
-32.0
-19.3
-95.9
-140.1
Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1998-2007,
January 1997, p. 41.
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Long-Run Deficit Projections
(Calendar year, percentage of GDP)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-5, p. 43.
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Long-Run Debt Projections
(Debt held by public, calendar year, percentage of GDP)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 2-2, p. 44.
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Will Federal Debt Be Eliminated?
• Debt held by public
• Projected to be zero in 2012
• Why might this projection prove incorrect?
• Projected surpluses might not occur
• Policies to cut taxes/increase spending
• Recessions
• Social Security Trust Fund may sell bonds to
public in exchange for equity
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Social Security:
Demographic Time Bomb
Beneficiaries per 100 Covered Workers
80
70
60
Intermediate
50
Low Cost
40
High Cost
30
20
1995 2005 2015 2025 2035 2045 2055 2065 2075
Source: 1998 OASDI Trustees Report, Table II.F.19
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OASDI Trust Fund Ratio
600
500
400
Intermediate
Low Cost
300
High Cost
200
100
0
1995 2005 2015 2025 2035 2045 2055 2065 2075
Source: 1998 OASDI Trustees Report, Table II.F.20
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Possible Solutions
• Increase Contributions by Workers
• Increase retirement age
• Reduce Benefits Paid to Retirees
• Increase retirement age
• Tax Social Security benefits
• Earn Higher Return on Assets in Trust Fund
• Invest in equities
• Privatize Social Security
• Individuals control allocation of assets
• Transitional problems
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Clinton Plan: Use of
Projected Surpluses, 15 Years
Transfer to Social Security
Transfer to Medicare
Transfer to USA Accounts
Military, education, research
%
62
15
11
11
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Surpluses, Deficits, and Debts*
• SS Surp. + On-Budget Surp. = Unified Surp.
• SS Def. + On-Budget Def. = Unified Def.
• DSSTF = SS Surp. = - SS Def.
• DGross Debt = On-Budget Def. = - On-Budget Surp.
• DDebt Held by Public = Unified Def. = - Unified Surp.
• -DSSTF + DGross Debt = DDebt Held by Public
• DGross Debt = DDebt Held by Public + DSSTF
*Ignores other off-budget items and trust funds
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Double Counting?
• Unified surplus results from SS surplus
• SS surplus increases SSTF anyway
• Transfer 62% of projected unified surplus to
Social Security
• DSSTF = SS Surplus + Transfer
• DGross Debt = Unified Deficit + Transfer
• Unified deficit and debt held by public unchanged
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Illustration of Transfer
to Social Security
Year
Transfer ?
SS Surplus
On-budget surplus
Unified surplus
Transfer to SSTF
DSSTF
DDebt held by public
DGross debt
2000
No
138
-7
131
0
138
-131
7
Yes
138
-7
131
81
219
-131
88
2009
No
217
164
381
0
217
-381
-164
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Yes
217
164
381
236
453
-381
72
40