Deficits, Surpluses, and the National Debt

From Deficits to Debt Because of deficit spending, the national debt has increased dramatically Sometimes, the government is forced to spend more than it collects because unexpected developments cause a drop in revenues or a rise in costs

Predicting the Deficit Depends on the way expenditures are reported and the state of the economy Why do you think the wars in Iraq and Afghanistan have been financed through “supplemental requests?” Changes in the economy affect budget projections. Economic growth could shrink the deficit

Deficits Add to the Debt When the federal government runs a deficit, it must finance the revenue shortage by borrowing Does this by selling U.S. Treasury notes and securities to the public The national debt grows whenever the government runs a deficit by spending more than it collects in revenues

A Growing Public Debt Money the government owes itself Ex: Trust funds -Huh? We TRUST the government with our federal tax dollars to put money away for us Social Security Medicare … etc Does this money just sit in someone’s desk… NEIN!!!!! They buy government securities until payment is due…

Public vs. Private Debt The country can never go bankrupt We owe most of the national debt to ourselves Private debt is owed to others Borrowing: Private citizens: make plans to repay debt by certain date Government: issues new bonds to pay off old bonds Purchasing power: Private individuals: give up purchasing power because they have less money to buy goods and services Government: does not give up power because the taxes collected from some groups are transferred to others

Impact of the National Debt The national debt affects the distribution of income and transfers purchasing power from the private to public sector The more the government borrows today, the more future generations will have to pay What other effects does the national debt have on the nation?

Transferring Purchase Power When the public debt increases, taxes increase and people have less money for themselves One generation to the next Accumulation of debt by one generation can thus reduce the economic well-being of the next

Reducing Economic Incentives Government can reduce economics incentives if it appears to spend money in a careless manner

Crowding Out When the federal government uses deficit spending, it must borrow money in financial markets Borrowing can drive interest rates up, forcing borrowers to pay more for the temporary use of funds If private borrowers cannot afford the higher interest rates, they are squeezed out of the market

Redistributing Income The national debt and the tax structure can impact the distribution of income The people paying less in taxes would benefit from the tax policy How does the transfer of purchasing power between generations affect you?

Reducing Deficits and the Debt Congress has tried a number of measures to reduce deficits and national debt Legislative failures (come up with new mandates / laws) Moving back SS age to collect Raising revenues (Higher Taxes / lower taxes) How would this work? What do you think has stopped the government from doing making this reduction possible since 2001?

Reducing Spending One way to control the deficit is by reducing federal spending What events in 2001 have added to the national debt? Do you think that the federal government will reduce the national debt in the next 15 years?