Deficit, Surpluses, and the Public Debt Chapter 18

Basic definitions  Budget Deficit – Amount which expenditures exceed revenues in a particular year  Budget Surplus – Amount which revenues exceed expenditures in a calendar year  National Debt – Total accumulation of deficits and surpluses over time

3 Approaches to the Budget  1. Actually balance it. Until 1930, the goal was to achieve a balanced budget. As we’ve learned however, the best way to counteract a recession is to reduce taxes and increase government spending. This only makes it more difficult to balance the budget and would almost always increase deficits.

Approaches to the Budget  2. Adapting from the first method the government will then try and balance the budget cyclically. In other words, spending during a recession could be counteracted by saving during inflationary periods or economic booms. In reality though, surpluses and deficits will not equally offset.

Approaches to the Budget  3. Functional Finance. Advocates argue that the budget is secondary to the real goals of the FED (Controlling inflation and promoting full employment). Balancing the budget should take a back seat to stimulating the economy.

Facts & Figures of National Debt  14 Trillion and climbing  Financing the military, economic recession, health care, and tax cuts all assist in increasing the debt.  Debt size though must be examined in comparison to GDP or the ability to pay. Currently, our GDP barely exceeds our debt.

Facts & Figures of National Debt  Relative comparisons show US debt to GDP ratios similar to those of other countries.  Annual interest payments on bonds sold to finance the debt remain the primary burden of the national debt.  Debt ownership – 37% The FED & other government agencies, 63% private. Of that 63%, 25% is held by foreign investors.

Debt Misconceptions  The Federal Government has little or no chance of ever going bankrupt. First, we can always sell bonds on the open market. Second, we can always raise taxes.  Any issues with this?

Future Generations  Fortunately, the majority of our debt is owned by Americans. When we make interest payments on it, the money stays with Americans. Increased foreign purchase of our debt will drastically could result in higher taxes and a decline in GDP.

Real Problems of National Debt  Income redistribution from the repayment of bonds  Higher interest rates on bonds which could increase tax rates and hinder growth  Foreign investment although Americans also own foreign bonds which offsets this

Recent Activity  Deficit Reduction Act  Raised top marginal rate from 31 to 39.6%  Corporate taxes raised 1%  Gasoline excise tax raised 4.3 cents per gallon.  No spending increases  Budget balanced by 1998

The Path to Destruction  Your text actually projects billions in surplus in the first decade of the 21 st century. It simply could not have predicted 9/11, 2 foreign wars, 1.5 trillion in bank bailouts topped off with a number of tax cuts. CBO estimates have 20 trillion in debt by 2020.