Transcript Fiscal Policy - Granbury ISD

FISCAL POLICY
Chapter 15
The use of government spending
and taxing to achieve economic
growth, full employment and
stable prices.
The Federal Budget
• An annual plan outlining proposed
revenues and expenditures for the coming
year (Oct 1-Sept 30). Currently a budget for this
year has not been agreed upon.
• The President through the Office of
Management and Budget (OMB) and
Congress with the help of the
Congressional Budget Office (CBO) work
together to draw up the next year’s budget.
The Federal government may use
fiscal policy to make the economy run
more smoothly.
If we are in a recession the government would
use expansionary fiscal policy
To expand the economy it would
increase government spending
and decrease taxes
If we have inflation the government
would use contractionary fiscal policy
To contract the economy it would decrease
government spending and increase taxes
GDP and CBO’s Estimate of Potential GDP, 2000 to 2019
GDP is expected to continue to decline into 2010
Trillions of dollars
http://www.cbo.gov/
Federal Spending
• Spending for 2010 was
• $3.518 trillion.
• Tax revenue for 2010 was
• $2.105 trillion.
• 2010 deficit was $1.413 trillion.
Government Debt and
Deficits
If government spending exceeds
government revenue (taxes) within
one year it is called a budget deficit
If government revenue exceeds
government spending within one
year it is called a budget surplus
The Total Deficit or Surplus 1969 to 2016
Q. How does the government spend money it
does not have?
A. They could print more, which would lead
to inflation or they have to borrow it.
Q. How does the government borrow money?
A. They sell U.S. treasury bonds, treasury
bills, or treasury notes.
Q. Who do they borrow it from?
A. Us (individuals, banks, and governments)
and foreigners.
The Federal Debt is the total of all budget deficits
and budget surpluses in our history.
http://www.usdebtclock.org/
Problems of a National Debt
Crowding-out effect
When government borrows it competes with
businesses for savers’ dollars making it harder
for businesses to borrow. A decrease in
business spending reduces overall GDP.
Problems of a National Debt
Interest Payments on the Debt
• Interest must be paid to bondholders and
over the years the interest payments have
become very large. The 2011 interest
payment will be $188 billion. This will
be 4.9% of the budget.
• An increase in interest payments means a
decrease in spending somewhere else.
There is a large opportunity cost involved
here.
Problems of a National Debt
Debt Held by Foreign Citizens
• The majority of the interest payments go to
U.S. citizens, but the number of foreign
holders of U.S. debt has increased to about
44% today.