Transcript Deficits_Debtx

Deficits and the Debt
GOVT 2305. Module 16
Concepts
What term describes each of the following?
 Revenues = expenditures
 Revenues > expenditures
 Revenues < expenditures
Balanced budget
Budget surplus
Budget deficit
Surplus in late 2000
When Bill Clinton left office
in 2001, the nation had a
budget surplus of more than
$200 billion. The 2000
election between Al Gore
and George W. Bush was
over what to do with the
surplus. Gore wanted to
shore up Social Security and
Medicare, as well as invest
in programs favored by
Democrats. Bush favored a
tax cut.
Bush Tax Cut
Rates under
Clinton
Rates under Bush
 10%
 15%
 28%
 31%
 15%
 25%
 28%
 33%
 36%
 35%
 39.6%
Congress also cut the estate
tax and taxes on dividends
and investments.
The Bush tax cuts expired at the end of 2012. Congress and the
president agreed to keep the Bush rates in place for all but the top two
brackets which reverted to 36 percent and 39.6 percent.
Taxes fall, spending increases
The Bush administration
soon found itself at war in
Afghanistan. In 2003, the
United States began
another war in Iraq. The
two wars together cost
hundreds of billions of
dollars.
More spending
Congress expanded the
Medicare program to include
a prescription drug benefit
at an annual cost of more
than $100 billion a year.
Congress also increased
spending on education,
agriculture, and other
items.
Adding a prescription drug benefit to Medicare was
more expensive than the Patient Protection and
Affordable Care Act and, unlike the latter, it was not
paid for. Its cost was added to the deficit.
Why does the
chart project
rising
expenditures
later in the
decade?
The baby boomers
are retiring and
collecting benefits.
Note: During recessions,
expenditures rise,
revenues fall. Why?
Revenues fell during the first part of
the G. W. Bush administration because
of tax cuts. They fell during the last
part because of the recession.
Why is the deficit
projected to grow?
What happened
here?
2016 deficit = $616 billion.
The retirement of
the baby-boomers.
National Debt
The national debt is the
accumulated borrowing of
the government. In late
2016, the debt stood at
$19.8 trillion.
What is the relationship
between the annual budget
deficit (surplus) and the
national debt?
The deficit and the debt
 An annual deficit
increases the national
debt by the amount of
the deficit.
 An annual surplus
decreases the national
debt by the amount of
the surplus.
Who holds our debt?
 Federal accounts, such
as Social Security trust
funds
 Domestic borrowers,
including banks,
insurance companies,
and pension funds
 Foreign borrowers,
including the Chinese
and Japanese
Who Holds the Debt?
Deficit Causes
 Deficits increase during
wartime
 Deficits increase during
recessions
 Deficits fall during
economic booms
 Deficits rise or fall
depending on policy
decisions
Debt service
The national government
pays interest on debt that is
owed to the public. In
2015, the government paid
$229 billion in interest on
the debt, 6.4 percent of
expenditures. Interest
expenditures are expected
to rise.
Why is interest expense
expected to rise?
The debt is growing and
interest rates are likely
to increase.
International Comparison
Debt as pct. Of GDP.
Deficits are not always bad
Economists generally agree
that deficit spending is an
appropriate government
response to a recession.
People thrown out of work
during a recession reduce
their spending and that
causes others to lose their
jobs as the economy spirals
downward. Business
reduces its spending as well
because of the slowing
economy. The government
can help reverse the cycle
by running a deficit.
Deficits as a problem
The deficit becomes an
economic crisis if and when
investors decide that the
U.S. government is no
longer a safe place to invest
their money. At some point,
investors may demand
substantially higher interest
rates before they loan the
U.S. government their
money, dramatically
increasing the cost of the
debt to U.S. taxpayers.
Average interest rates
on U.S. treasury
securities that mature
in 10 years are less
than 2 percent.
Global Bond Yields
Worst case
In the worst possible
scenario, Chinese,
Japanese, and other foreign
investors will tell U.S.
officials that they will no
longer loan the U.S.
government money unless it
dramatically increases taxes
and cuts spending in order
to reduce its deficit. Those
steps would likely harm the
U.S. economy.
Deficit Politics—Democratic
Priorities
 Appear to be serious about the deficit and the debt while
blaming Republicans for being inflexible
 Avoid spending cuts large enough to threaten economic
recovery
 Increase spending on education, research,
transportation, etc. to promote economic development
and job growth
 Protect priority domestic programs—Social Security,
Medicare, education, student loans, environment,
transportation, etc.
 Raise revenue by closing tax loopholes that benefit
business and the rich
 Reduce the deficit
Republican Priorities
 Appear to be serious about debt reduction while blaming
Democrats for refusing to cut spending
 Oppose any and all tax increases including closing tax
loopholes
 Cut capital gains taxes and corporate income taxes
 Cut most domestic spending (Medicaid, Food Stamps,
transportation, education, medical research, etc.)
 Protect Medicare and Social Security for current and
near retirees while reducing spending for future retirees
 Increase defense spending
 Reduce the deficit
Trump priorities
 Cut ta rates
 Repeal the inheritance tax
 Increase defense spending
 Protect Social Security and Meidcare
What You Have Learned
 What is the history of budget
deficits?
 What is the difference between
the deficit and the national
debt?
 Why is deficit reduction hard
to do?