15-1 & 3 Fiscal Policy Budget Deficits and Nat’l Debt Goals – 1. Define “Fiscal Policy”. 2. Compare Expansionary vs. Contractionary policies and their purpose. 3. Analyze the limitations of Fiscal Policies 4. Explain how budget deficits add to nat’l debt. 5. Summarize problems caused by nat’l debt 6. Identify how gov’t can reduce deficit and debt.

Fiscal Policy -The use of gov’t spending and revenue collection as a means of influencing the economy. Federal Budget – Process similar to bill becoming a law- both Houses and President. Depts-OMB –Prez/Staff – presented to Congress (CBO & Cmtes) In Jan - Appropriations Cmte/Bills – Pres for approval by Sept 30th or emergency funding must be approved Fiscal Year – October – September How?

Expansionary vs. Contractionary Expansionary- Purpose? What can they do? Policies designed to spur economic growth Spending? Revenue? Contractionary – Purpose? What can they do? Policies designed to slow economic growth Spending? Revenue?

Limitations of Fiscal Policy Difficulty in Changing– 60% of budget is entitlement programs –cannot be changed without changing other laws first, can only come from discretionary funding Predicting the future -hard to know where you are going, easy to know where you have been- often gov’t lags behind changes and bases it on past experience which may or may not be correct. Delayed Results - Budgets generally take 18 mos to plan and vote on and don’t go into effect till next fiscal year, so by the time changes have been made it might be 2 years down the road… Political Pressures - People prefer Expansionary policies not Contractionary Co-ordinating Fiscal Policy –Gov’t agencies have to work together

National Budget Federal Budget- spending plan of the government accounting for revenues(taxes) and expenditures (spending) Balanced Budget? Money in = Money Out - hardly ever balanced, usually a surplus - deficit-

Surplus/Deficit Scenarios Assume Gov’t starts with a balanced budget If revenues(taxes) stay the same but spending = If revenues stay the same, but spending If revenues go but spending stays the same

Deficits Deficits are not always w/i gov’t control recessions = lower spending = lower taxes Largest deficit to date – 2009 =1.42 Trillion $ 2010 = 1.29 Trillion $ How much is a trillion?

Gov’t responses to Deficits What could they do? 1. Print $ - Used to be a gold standard – no longer Gov’t can print $ as needed - if output is at capacity = inflation hyperinflation- extremely high inflation of prices 2. Borrow $ - gov’t borrows $ by selling bonds, bonds are like a loan with a promise of future interest T-Bills - short term bonds paid in one year or less T- Notes- mid-term, 2 – 10 years T-Bonds- long term, 10 -30 yrs (T=Treasury)

Deficit vs. Debt National Deficit = gov’t spends more than it brings in National Debt = money owed by gov’t to all its bondholders accumulates over time Deficit = one year’s worth of spending & revenue Debt= total for all outstanding debts, current and past years minus the borrowings that have been repaid U.S. bonds are seen as low risk, so offer lower interest rates, but seen as a very safe investment (starting to be seen as less stable due to economy in 2011 US Govt’s credit rating went from AAA to AA+) debt clock

Problems caused by Nat’l Debt 1. Debt reduces funds available for businesses to invest. more people buying gov’t bonds = less people investing in private stocks Crowding out effect- loss of funds avail. for private business due to increased gov’t borrowing 2. Gov’t must pay the interest on bonds as they mature, “servicing the debt” – this is money that must be accounted for and cannot be used on either items 3. Short-term deficits could be beneficial if the $ is used to better economy, but if not repaid quickly can lead to huge debts debt clock 2