Deficits, Surpluses, and the National Debt

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

From Deficits to Debt When the federal government runs a deficit, it must finance the revenue shortage by selling U.S. Treasury notes and other securities to the public. The national debt is equal to all outstanding federal notes, bonds, and other debt obligations. A balanced budget does not change the national debt.

Two alternative views of the total national debt From Deficits to Debt A portion of the national debt is money the government owes itself as in trust funds. Two alternative views of the total national debt Debt as a percentage of GDP National debt computed on a per capita basis

Differences between public and private debt From Deficits to Debt Differences between public and private debt Country can never go bankrupt—most of debt is owed to itself. Repayment—new bonds are issued to pay off old bonds. Little purchasing power is given up.

Impact of the National Debt The national debt affects the distribution of income and transfers purchasing power from the private to the public sector. The national debt, although mostly owed to ourselves, still affects the economy by Transferring purchasing power from private sector to public sector Reducing economic incentives Causing a crowding-out effect Redistributing income

Reducing the Deficits and Debt Congress has tried a number of measures to reduce deficits and the national debt. Concern over deficit spending led to attempts to control it. Congress mandated a balanced budget. “Pay-as-you-go” provision Line-item veto and spending caps Raising revenues Reduced spending—difficult because of entitlements

Reducing the Deficits and Debt Action to reduce budget deficits and the national debt will depend on the willpower of Congress to make unpopular and difficult choices.