The Federal Budget and the National Debt

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The Federal Budget and the National Debt

• Outline
• The federal deficit (surplus) definedagain
• The record of of the federal budget
• The automatic stabilizers.
• Why a federal deficit has an expansionary effect
  on real GDP and employment.
• The national debt defined
• The record of the national debt
• Should we be concerned about a large national
  debt?

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Federal Finance
If G exceeds T in a fiscal year, then we have a
federal deficit.If, however, T exceeds G, then
we have a federal surplus.

• Let
• G denote federal spending for goods and services
  in a fiscal year (Oct. 1 thru Sept. 30).
• TX is federal tax receipts.
• TR is federal transfer payments.
• T is federal net taxes (TX - TR)

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Automatic Stabilizers
Taxes (TX) and Transfer Payments (TR) are
called automatic stabilizers because they react
to changes in national income in a way that
increases the federal deficit (or reduces the
surplus) in the event of an economic contraction
or reduces the deficit (increases the surplus)
when the economy is expanding.
The automaticstabilizers make sure that YD does
notfall too muchwhen national incomeis falling
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Remember that the federaldeficit or surplus
isequal to the differencebetween G and Net Tax
Receipts,where Net Taxes are equal toTX - TR

• ?Y??TX, for example
• ?Y??TX, and vice versa
• ?Y??TR, for example
• ?Y??TR, and vice versa

Note that claims for unemployment compensation
and other assistance surges when unemployment
rises.
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YR is the recession-level of national income
G, T
Full-employment
T TX - TR
G
Deficit
Balanced budget at full-employment
0
YR
National Income
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Why a budget deficit has an expansionary effect
on real GDP (income) and employment.
G
Remember that government expenditures are an
injection and net takes are a leakage into the
circular flow of economic activity.
GDP (Income)
T
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If, ceteris paribus, G gt T, then real GDP and
employment will expandat least in the short run.
G
GDP (Income)
T
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In the case of a federal deficit, the Treasury
must borrow. The national debt is the accumulated
borrowing of the federal government in all
previous fiscal years, minus what has been repaid
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Is a large national debt a bad thing?

• Arguments against a large national debt include
• The burden on future generations argument.
• A large national debt means that a significant
  share of federal spending must be allocated for
  interest paymentsleaving less for other
  priorities.
• A large national debt makes the U.S. too
  dependent on foreign financial inflows.
• Federal borrowing crowds out private sector
  borrowing unitsi.e., firms and households.

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We (the U.S.) owe 5.7 trillion in debt
and if we dont pay it off, our children and our
grandchildren are going to have to.
Congressman Marion Berry, in a speech to the
Jonesboro Lions Club on April 16, 2001.
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