Fiscal Policy Chapter 15 Section 3 Budget Deficits and the National Debt

Fiscal Policy  Objectives: Explain the importance of balancing the budget. Analyze how the budget deficits add to the national debt. Summarize the problems caused by the national debt. Identify how a government can reduce budget deficits and the national debt.

Fiscal Policy  Balancing the Budget The basic tool of fiscal policy is the federal budget. It is made up of two fundamental parts:  Revenue (taxes) and Expenditures (spending programs) When the federal government’s revenues equal its expenditures we have balanced budget. Balanced Budget – the same amount of money going into and coming out of the Treasury. In reality, the Federal Budget is never balanced. Either we have a surplus or a deficit (shortage).

Fiscal Policy Budget Surplus – occurs in any year when revenues exceed expenditures. There is more money going into the Treasury than coming out of it. Budget Deficit – occurs in any year when expenditures exceed revenues. When the government has a budget deficit, it means that it did not take in enough revenue to cover its expenditures for that year. The government must find a way to pay for the extra expenditures.

Fiscal Policy  Two ways to do this is…  Creating Money Gov’t can create new money to pay the salaries of workers and benefits for citizens. Today they can create new money electronically by depositing money into people’s bank accounts. When the Gov’t. does this, they are putting more money into circulation. This will lead to greater demand for goods and services.

Fiscal Policy Then prices will rise because of the demand increase. This leads to inflation.

Fiscal Policy  Borrowing Money The Fed. Gov’t. can borrow money. Can do this by selling bonds. Can sell Treasury Bills, Treasury Bonds, or Treasury Notes. This will allow the government to undertake more programs with added money. This leads to an increase in our national debt.

Fiscal Policy U.S. N ATIONAL D EBT C LOCK The Outstanding Public Debt as of 16 May 2014 at 08:23 AM: The estimated population of the United States is 316,148,990. so each citizen's share of this debt is $55, The National Debt has continued to increase an average of $1.44 billion per day since September 29, 2006! Concerned? $17,470,441,930,816.05

Fiscal Policy  The National Debt The total amount of money the federal government owes to bondholders. Every year there is a budget deficit, we add to the national debt. The national debt is owed to investors. The growth of the national debt during the Reagan Administration led many to focus on the problem. Problem with national debt… it reduces the funds available for business to invest and gov’t. has to pay interest on the debt.

Fiscal Policy  There have been attempts to reduce the debt each year.  Gramm-Rudman-Hollings Act created automatic across-the-board cuts in federal expenditures to deal with the deficit.  There are some loop-holes in this act that hurt the general purpose of the bill.  1991 – developed a pay-as-you-go plan to deal with the national debt.

Fiscal Policy  Talk about a Balanced Budget Amendment like the state governments have – but no way this will happen.  When you have extra revenues available, there is always pressure to spend it in other ways, i.e. Social Security, disasters, and etc, instead of paying off the debt.