Transcript Présentation PowerPoint - McGraw Hill Higher Education

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CHAPTER
19
Deficits, Debts, and Fiscal
Policy
Learning objectives




Understand that, between 1975 and 1996, the federal
government ran fiscal deficits. By the end of the 1990s,
the federal government was in a fiscal surplus position.
Understand that the budgetary deficit is composed of
the operating deficit plus interest on the public debt.
Understand that the debt to GDP ratio has exhibited
three peaks: during the Great Depression, during World
War II, and the mid-1990s, when the federal government
began reducing budget deficits.
Understand that when the government finances its
deficit by issuing money, the government is imposing
an inflation tax.
PowerPoint® slides prepared by Marc Prud’Homme, University of Ottawa
Copyright 2005 © McGraw-Hill Ryerson Ltd.
Revenues, Expenditures,and Deficits
Copyright 2005 © McGraw-Hill Ryerson Ltd.
Chapter 19: Deficits, Debts, and Fiscal Policy
o Direct Taxes: taxes directly applied to
persons and corporations, and include
items such as personal and corporate
income taxes.
o Indirect Taxes: Taxes levied on goods
such as the GST.
o Government Purchases: Government
spending on currently produced goods
and services.
o Transfer payments: Spending for which
the government does not receive goods or
services in return.
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Revenues, Expenditures,and Deficits
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Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-1: Total Revenue and Components, All Governments, 1961-2002 (%
of GDP)
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Revenues, Expenditures,and Deficits
Copyright 2005 © McGraw-Hill Ryerson Ltd.
Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-2: Total Expenditure and Components, All Governments, 1961-2002
(% of GDP)
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BOX
Fiscal Policy, the GD, and Keynesian Economics
19-1
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Revenues, Expenditures,and Deficits
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Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-3: Total Revenue and Components, Federal Government, 1961-2002
(% of GDP)
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Revenues, Expenditures,and Deficits
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Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-4: Total Expenditures and Components, Federal Government, 19612002 (% of GDP)
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Measuring the Federal Deficit
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Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-5: Revenue, Expenditure, and Deficit, Federal Governments, 19612002 (% of GDP)
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Measuring the Federal Deficit
o Operating Deficit: The budget deficit
excluding interest payments.
o Burden of the debt:
o In 2001, the gross national debt exceeded $600
billion.
o $21,000 per person.
o Can reduce the capital stock or increase
external debt.
o Debt-income ratio: Debt/PY = Debt/GDP
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Chapter 19: Deficits, Debts, and Fiscal Policy
Total deficit = Operating Deficit + Interest payment
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BOX
19-2
Fiscal Federalism
Transfers to Other Governments and
Expenditures, as % of GDP.
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Slide 10
Measuring the Federal Deficit
Copyright 2005 © McGraw-Hill Ryerson Ltd.
Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-6: Budgetary Deficit, Primary Deficit, and Interest on the Public
Debt, Federal Government 1961-2002 (% of GDP)
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Measuring the Federal Deficit
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Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-7: Federal Government Debt-to-Income Ratio, 1926-2001 (% of GDP)
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Deficits and the Inflation Tax
Budget Deficit = Sales of Bonds + Increase in
Monetary Base
o Links between deficits and money growth:
o Higher deficits in the short run caused by expansionary
fiscal policy will rise nominal and real interest rates. The
Bank may raise the supply of money to keep interest
rates in check.
o Increased money supply to increase revenue in the
future.
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Chapter 19: Deficits, Debts, and Fiscal Policy
o Government Budget Constraint: A limit that says
the government can finance its deficits only by
selling bonds (more debt) or by increasing the
monetary base.
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Deficits and the Inflation Tax
o If doesn’t monetize = crowding out.
o If monetize = Inflation
o Canadian Experience: See Figure 19-8.
o Inflation Tax: Revenue gained by the government
because of inflation’s devaluation of money
holdings.
Chapter 19: Deficits, Debts, and Fiscal Policy
o Monetization: When the BOC purchases part of
the debt sold by the Department of Finance to
finance the deficit.
o Bank of Canada’s Dilemma: Monetize the deficit
or not to monetize?
o Seigniorage: Revenue derived from the government’s
ability to print money.
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Deficits and the Inflation Tax
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Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-8: Money and Deficits, 1963-2001
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Measuring the Federal Deficit
Inflation Tax Revenue = Inflation tax x Real Money Base
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Chapter 19: Deficits, Debts, and Fiscal Policy
Table 19-1: Inflation and Inflation Tax, 1983-1988 (percent)
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Measuring the Federal Deficit
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Chapter 19: Deficits, Debts, and Fiscal Policy
Figure 19-9: The Inflation Tax
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BOX
Real Balances and Inflation
19-3
Increased nominal money growth reduces the long
run real money stock.
Higher inflation raises the nominal interest rate
and hence raises the opportunity cost of holding
money.
Money holders will reduce the amount of real
balances they hold.
Prices are rising faster than money.
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Intergenerational Accounting
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Chapter 19: Deficits, Debts, and Fiscal Policy
o Intergenerational Accounting: Evaluate the costs
and benefits of taxes and spending for various
age groups of society.
o Size-of-Government Debate
o The Barro-Ricardo problem:
o Traditional AD & AS = Lower taxes => higher
AD => higher interest rates => more crowding
out.
o “Are government bonds net wealth?” or The
Barro-Ricardo Equivalence Proposition
(Ricardian Proposition): Debt financing by
bond issue merely postpones taxation and
therefore, in many instances, is strictly
equivalent to current taxation.
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Canada Pension Plan
1) Population growth
2) Real income growth
3) Political process
Chapter 19: Deficits, Debts, and Fiscal Policy
o Pay-as-Go System: Social security system
in which payments to retirees are made
with funds provided, not by their social
security taxes, but by the social security
taxes of the working populace.
o CPP/QPP transfer resources from the
young to the old for three reasons:
o Social Security and Economic Efficiency.
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Canada Pension Plan
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Chapter 19: Deficits, Debts, and Fiscal Policy
Table 19-2: The Ratio of Working-Age Population to Retirement Age
population
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Chapter Summary
Copyright 2005 © McGraw-Hill Ryerson Ltd.
Chapter 19: Deficits, Debts, and Fiscal Policy
• The federal government ran budget deficits for
each year between 1973 and 1996. By the end of
the 1990s, it was in a budgetary surplus.
• The budgetary deficit is composed of the
operating deficit plus interest on the public debt.
• The debt-GDP ratio has exhibited three peaks: GD,
WWII, mid 1990s.
• When the government finances its deficit by
issuing money, the government is imposing an
inflation tax.
• Social Security is financed as a pay-as-you-go
system.
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Chapter Summary (cont’d)
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Chapter 19: Deficits, Debts, and Fiscal Policy
• The current Bank of Canada policy is to set the
overnight rate.
• The Monetary Conditions Index “MCI” is a
weighted average of the short term interest
rate and the exchange rate.
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The End
Chapter 19: Deficits, Debts, and Fiscal Policy
Copyright 2005 © McGraw-Hill Ryerson Ltd.
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