Deficit, Surpluses, and the Public Debt

1
Deficit, Surpluses, and the Public Debt

• Chapter 18

2
Basic definitions

• Budget Deficit Amount which expenditures exceed
  revenues in a particular year
• Budget Surplus Amount which revenues exceed
  expenditures in a calendar year
• National Debt Total accumulation of deficits
  and surpluses over time

3
3 Approaches to the Budget

• 1. Actually balance it. Until 1930, the goal was
  to achieve a balanced budget. As weve learned
  however, the best way to counteract a recession
  is to reduce taxes and increase government
  spending. This only makes it more difficult to
  balance the budget and would almost always
  increase deficits.

4
Approaches to the Budget

• 2. Adapting from the first method the government
  will then try and balance the budget cyclically.
  In other words, spending during a recession could
  be counteracted by saving during inflationary
  periods or economic booms. In reality though ,
  surpluses and deficits will not equally offset.

5
Approaches to the Budget

• 3. Functional Finance. Advocates argue that the
  budget is secondary to the real goals of the FED
  (Controlling inflation and promoting full
  employment). Balancing the budget should take a
  back seat to stimulating the economy.

6
Facts Figures of National Debt

• 14 Trillion and climbing
• Financing the military, economic recession,
  health care, and tax cuts all assist in
  increasing the debt.
• Debt size though must be examined in comparison
  to GDP or the ability to pay. Currently, our GDP
  barely exceeds our debt.

7
Facts Figures of National Debt

• Relative comparisons show US debt to GDP ratios
  similar to those of other countries.
• Annual interest payments on bonds sold to finance
  the debt remain the primary burden of the
  national debt.
• Debt ownership 37 The FED other government
  agencies , 63 private. Of that 63, 25 is held
  by foreign investors.

8
(No Transcript)
9
Debt Misconceptions

• The Federal Government has little or no chance of
  ever going bankrupt. First, we can always sell
  bonds on the open market. Second, we can always
  raise taxes.
• Any issues with this?

10
Future Generations

• Fortunately, the majority of our debt is owned by
  Americans. When we make interest payments on it,
  the money stays with Americans. Increased foreign
  purchase of our debt will drastically could
  result in higher taxes and a decline in GDP.

11
Real Problems of National Debt

• Income redistribution from the repayment of bonds
• Higher interest rates on bonds which could
  increase tax rates and hinder growth
• Foreign investment although Americans also own
  foreign bonds which offsets this

12
Recent Activity

• 1993 - Deficit Reduction Act
• Raised top marginal rate from 31 to 39.6
• Corporate taxes raised 1
• Gasoline excise tax raised 4.3 cents per gallon.
• No spending increases
• Budget balanced by 1998

13
The Path to Destruction

• Your text actually projects billions in surplus
  in the first decade of the 21st century. It
  simply could not have predicted 9/11, 2 foreign
  wars, 1.5 trillion in bank bailouts topped off
  with a number of tax cuts. CBO estimates have us
  _at_ 20 trillion in debt by 2020.