Deficits & National Debt

Federal Deficit & Debt Federal gov’t spending falls into 1 of 3 categories: Balanced budget: when there is no debt or overage Budget surplus: when the gov’t takes in more than it spends Budget deficit: when the gov’t spends more than it takes in Deficits & surpluses refers to only one year. Deficit spending: occurs when a gov’t spends more than it collects in revenue for a specific budget year. Annual deficits contribute to National debt: which is the total amount of money that the gov’t owes.

II. Causes of the Deficit National Emergencies wars, or catastrophic weather events Need for Public Goods & Services Public goods need to be funded: interstate highways, dams, airports. Stabilization of the Economy Gov’t spending that is used to stimulate the economy: building roads, schools, parks… Role of Gov’t in Society Gov’t programs: Social Security, Medicare, Medicaid, unemployment

III. Raising $ for Deficit Spending When the federal gov’t does not receive enough money from taxes to finance its spending, it can borrow money by issuing gov’t bonds. Bonds are purchased by anyone. Central banks of other countries make up over 40% on US bondholders, mainly Japan & China.

IV. The National Debt Trust Funds The gov’t borrows trust funds, which are funds being held for specific purposes to the used at a future date. Ex: Social Security, Medicare, Medicaid. When trust funds accumulate surpluses by taking in more tax revenue than is needed, the surplus is invested in gov’t bonds until the specific programs need the money. The gov’t is basically borrowing from itself to cover deficit spending. Size of the National Debt The current national debt is $18+ trillion. In 2006 it was $8.4 trillion.

c. Attempts to Control Deficits & Debt 1. Try to eliminate the deficit completely within 5 years 2. Set limits on discretionary spending & mandate that new spending required cuts elsewhere in the budget. “Pay-as-you-go” 3. Combo of tax increases & spending cuts. 4. Spending cuts in entitlement programs (Medicare, Social Security…) All has limited success, the gov’t continues to struggle with how to control the national debt.