Budget Deficits and the National Debt

Basics about Deficits  National debt: total amount owed by government  Budget deficit : government spending minus government revenue  Typically financed by issuing government bonds  Size measured as a percent of GDP  Rises during recessions regardless of policy due to decline in government revenue and increase in social welfare payments  Structural deficit : deficit if the economy was operating at its potential

Impact of Deficits & Debt  Depends on size and method of financing  Domestic financing tends to crowd out other borrowers  Foreign financing leads to stronger currency and larger trade deficit  May also create dependence on foreign funds, which tend to be more volatile  Central bank financing puts upward pressure on inflation  What’s too high?