Deficits, Surpluses, and the National Debt Please listen to the audio as you work through the slides

Deficits, Surpluses, and the National Debt Learning Objectives: Students will be able to thoroughly and completely explain: 1. The 3 federal budget philosophies, 2. The composition, size, and evolution of the national debt. 3. Issues associated with paying off the national debt.

Definitions: Federal Budget Budget Deficit – spending > revenues Budget Surplus – revenues > spending National or Public Debt: The total accumulation of deficits (minus surpluses) the federal government has incurred over time. More specifically – the outstanding government bonds (securities). U.S. Securities are: Treasury bills, treasury notes, Treasury bonds, US savings bonds. Deficits, Surpluses, and the National Debt

Budget Philosophies 1. Annually Balanced Budget Favored by fiscal conservatives who want smaller public sector Problems: Incompatible with govt. fiscal policy activity Intensifies the business cycle Recession – tax revenue automatically fall Inflation – tax revenue automatically rises To balance budget with recession – Increase tax rates Reduce govt. spending, or Both All of which are contractionary and intensifies the recession

Deficits, Surpluses, and the National Debt Budget Philosophies 2. Cyclically Balanced Budget Govt. can exert countercyclical influence and balance the budget. Balance budget over a business cycle rather than annually. During recession, run deficit During inflation, run surplus Budget balanced over the business cycle. Problem: upswings and downswings are not equal. when cycles start and end is unclear.

Deficits, Surpluses, and the National Debt Budget Philosophies 3. Functional finance Primary goal – Provide non-inflationary full employment to balance the economy. Use the budget to manage the economy.

Wars – selling of bonds Recessions – deficit financing due to decreased revenues Lack of Fiscal Discipline – congress, all of us. The National Debt Causes: Quantitative Aspects Debt and GDP – debt as a % of GDP (a key indicator) What happens when your credit card bill equals your pay check? Interest Charges – paid by tax revenue or refinance Ownership – The public (domestic and foreign) Federal agencies

Social Security Considerations Social Security Trust Fund Surplus invested in US securities Included in public dept computation, which makes the debt appear smaller than it really is. The National Debt

False concerns The National Debt Bankruptcy – not really an issue Due to: Refinancing – issue new securities to fund payoff of those that come due. Taxation – govt. can increase taxes to finance the debt.

False concerns The National Debt Burdening Future Generations -The portion owed to Americans could be paid off with a massive income transfer. -Taxpayers would pay more and US securities holders would be paid.

False concerns The National Debt Burdening Future Generations - The 30% owned by foreigners would impact our economy.

Income Distribution Ownership of US securities is unevenly distributed. Interest payments increase income inequality. Incentives Higher taxes to pay the interest on the dept may discourage innovation, investment. Substantive Issues

Foreign-Owned Public Debt External Public Debt – debt owned by foreigners is income to them. They can use that money to purchase goods from the US. Substantive Issues

Crowding Out and the Stock of Capital Higher public debt leads to higher real interest rates which reduces private investment spending. Public Investment – increase the economy’s future production capacity. May offset the crowding out effect. Public-Private complementarities Substantive Issues

Pay Down the Public Debt Cut Taxes Increase Federal Expenditures Back to Deficits in 2002 Bush Tax Cuts of 2001 The Economic Downturn September 11, 2001 Tax Cuts of 2003 Some Options for Surpluses

public debt U.S. Securities annually balanced budget cyclically balanced budget functional finance Social Security trust fund external public debt public investments