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
• The President through the Office of
Management and Budget and Congress
through the Appropriations Committees 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/
Although fiscal policy is a
powerful tool, it may be difficult
to put into practice
Difficult to change spending levels
Spending on Social Security & Medicare is
mandatory.
Difficult to predict the future
Politicians may put off implementing fiscal policy
because they are unsure of its results
Delayed results
Takes time for Congress to pass laws
Takes time for money to circulate into the economy
Federal Spending
• The projected spending for 2009 is
• $3.85 trillion.
• The projected tax revenue for 2009 is
• $2.19 trillion.
Government Debt and
Deficits
If government spending exceeds
government revenue (taxes) within
one year it is called deficit spending
If government revenue exceeds
government spending within one year
it is called a budget surplus
The Total Deficit or Surplus 1969 to 2016
2009 Projected deficit is $1.67 trillion.
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 private businesses to borrow. A decrease in
business spending reduces overall GDP.
Interest Payments on the Debt
• Interest must be paid to bondholders and
over the years the interest payments have
become very large. The 2007 interest
payment was $239 billion. This was 9%
of the budget.
• An increase in interest payments means a
decrease in spending somewhere else.
There is a large opportunity cost involved
here.
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.