1 Federal Deficits, Surpluses and the National Debt Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College Publishing

2 What will I learn in this chapter? How the budgetary process formulates and finances our national debt

3 What puzzles will I learn to solve?  Can Uncle Sam go bankrupt?  How does the national debt of the U.S. compare to the debt of other countries?  Are we passing the debt burden to our children ?  Who owns the national debt?

4 What are the four stages of the budget process? Formation of the budget Presidential budget submission Budget resolution Budget passed

5 What is the federal fiscal year? October 1 through September 30

6 What is the federal deficit? How much money the government borrows in any given fiscal year

7 What is the national debt? Amount owed by the federal government to owners of government securities

8 How does the U.S. Treasury borrow money? By selling securities promising to make interest payments and to repay on a given date

9 Federal Expenditures and Tax Revenues $2,000 $400 $800 $1,200 $1, $2,400 $2,800 Billions of dollars Revenues Expenditures

$ Federal Budget Surpluses and Deficits Billions of dollars Deficit

11 What is the net public debt? National debt minus all government inter-agency borrowing

12 17 Percentage of GDP Federal Expenditures and Tax Revenues Deficit Surplus Deficit

13 What has been done to curb the national debt? Tax increase Spending caps Debt ceiling

14 What happened to taxes in 1993? Raised the highest marginal tax rate from 31% to 36% Increased tax on gasoline by 4.3 cents per gallon

15 What happened to spending in 1993? Reduced military spending and and cut some entitlements, including Medicare, Medicaid, and food stamps

16 What is the Balanced Act of 1997? The act continued mandatory limits on spending and taxes

17 What happened between 2004 and 2006? Tax revenues as a percentage of GDP grew, while expenditures as a percentage of GDP remained constant

18 What is a debt ceiling? The legislated legal limit on the national debt

19 What usually happens when the debt pushes against the ceiling? Congress raises the ceiling to accommodate the budget deficit

20 $2 $3 $4 $5 $6 $ Trillions of dollars $8 The National Debt

The National Debt as a Percentage of GDP Percentage of GDP

22 What is the internal national debt? The portion of the national debt owed to a nation’s own citizens

23 What is the external national debt? The portion of the national debt owed to foreign citizens

24 Canada FranceSwedenU.S.AustraliaGermanyU.K.Japan Italy 176% 121% 75% 71% 68% 65% 56% 48% 15%

Federal Net Interest as a Percentage of GDP, Percentage of GDP

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27 What is the crowding-out effect? When federal government borrowing increases interest rates, the result is lower consumption and investments

28 Can Uncle Sam go bankrupt? Yes, it’s possible No, the debt need never be paid off

29 Are we passing the debt burden to our children? Yes, especially if it continues to increase No, not as long as the debt is internally owned

30 Does government borrowing crowd out private-sector spending? Yes, the more the government borrows the less loanable funds for everyone else No, especially if it occurs during economic downturns

AD 1 AS AD AD 2 E2E2 E1E1 E2E2 full employment Zero, Partial, and Complete Crowding Out

32 Govt. spends and borrows Govt. competes with private borrowers Interest rates rise Consumers and business spending decrease AD and real GDP increase dampened

33 END