AGD ▪ How much do you owe in education loans?

AGD ▪ How much do you owe in education loans? ▪ Add that to this! ▪ Dividing all USA debt by the labor force in the U.S. shows that American workers each owe a record $100,720. That's double what they owed during 2004.

Reducing the Budget Deficit: Policy Issues Presentation by Atunonyele Samu October 9, 2013 Marc Labonte, April 22, 2011

Introduction ▪ Deficit: Spending exceeding Revenues ▪ How does the federal government generate income? ▪ How does the federal government spend its income, in other words what are its obligations?

Introduction ▪ What is the big deal? ▪ Interest rates are low and there are investors willing to finance USA debt, why worry?

Introduction ▪ What is the big deal? ▪ Interest rates are low and there are investors willing to finance USA debt, why worry? ▪ Sustainability – Size of debt growing faster than our income – Passing on a something worse off to the next generation

History ▪ Current deficit spending dates back to 2002 and in 2009, it topped 1 trillion dollars. ▪ Bigger in dollar amount since WWII ▪ Bigger as a share of GDP since WWII ▪ What is the difference between deficit spending and national debt? (Measured as percentages of GDP)

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How Much Deficit Reduction is Necessary? Depends on policy goal 1.Policy goal 1 Increase the national savings rate or have a neutral effect Balanced structural budget or a budget surplus with modest deficit spending in downturns. 2. Policy goal 2 Return fiscal policy to a sustainable path: We want GDP to grow faster than government debt. What this means: budget deficit no larger than 3% of GDP in the next 10 years, a combination of tax increases and spending cuts of about 9% of GDP. NOTE: Assumption were made on interest rate growth and GDP growth rate.

How Quickly should the Deficit Be Reduced? Contractionary policy would increase unemployment or reduce its rate of decrease, therefore reducing deficit spending in a recession is difficult- an argument for doing this later

How Quickly should the Deficit Be Reduced? Contractionary policy would increase unemployment or reduce its rate of decrease, therefore reducing deficit spending in a recession is difficult- an argument for doing this later. Chalk board talk- difference between contractionary policy and expansionary policy

Policy Options for Deficit Reduction 1.Freeze Discretionary Spending ▪ Discretionary spending is what the President and the Congress decide to spend through annual appropriations bills. Examples include money for such activities as the FBI, the Coast Guard, housing and education, space exploration, highway construction, defense, and foreign aid. ▪ Would require that in nominal terms it actually falls to be of any significance and the likeliness of this is minimal

Policy Options for Deficit Reduction 2. Mandatory Spending Grew from 5% of GDP in 1962 to 13% of GDP between ▪ Social Security, Medicare & Medicaid ▪ Financial Crisis programs and automatic stabilizers Economic Stimulus Act -TARP (Troubled Asset Relief program) -GSE (Government Sponsored Enterprise) ▪ Entitlement programs - Baby boomers have increased number of recipients. However savings on this issue are long term and not short term and therefore do not reduce the deficit in the short run

Policy Options for Deficit Reduction 3. Revenues Revenues lowest historically as a share of GDP ▪ Individual income taxes ▪ corporate income taxes ▪ Social insurance receipts ▪ Excise taxes Expiration of Bush Tax cuts and AMT (Alternative Minimum Tax) patch would increase revenues significantly OR due an improvement of the economy given status quo, revenues should increase (real Bracket creep)

Policy Options for Deficit Reduction 3. Revenues How to do it a)Redesigning the structure of the tax system b)Adding new revenue resources, such as carbon tax or a value added tax (VAT) c)Increasing existing taxes d)Broadening the tax base – by eliminating tax expenditures (Deductions, exemptions, and credits) e)Allowing tax cuts to expire as scheduled

What Caused the Budget Deficit? FY2000 – $236 billion Surplus. CBO projected a $796 billion surplus for FY2010 ▪ Enactment of legislation (Biggest contributor) ▪ Economic conditions ▪ Technical changes

What Caused the Budget Deficit? A. Legislative Changes Enacted laws affecting revenue, mandatory spending or discretionary spending: These Increased national debt and the cost of debt servicing. Alone these changes increased federal budget deficits by 6.9 trillion ▪ Bush Tax cuts and various extensions of its provision- 213 billion ▪ 2009 Economic Stimulus Act-220 billion and 180 billion in spending cuts ▪ Discretionary spending- 300 billion for defense, 132 billion for non defense

What Caused the Budget Deficit? A.Legislative Changes ▪ Legislation between 2001 and 2008 caused 2009 deficit to grow by 903 billion ▪ If no legislation was enacted in after 2008, we would still have a deficit of 900 billion in 2009 ▪ Mandatory spending not responsible for deficit spending, legislation is to blame ▪ Legislation enacted in FY2009 caused the 2009 deficit to grow by 509 billion Emergency Economic stabilization act 2009 Economic Stimulus Act

What Caused the Budget Deficit? B. Economic Variables Unemployment, inflation and interest rates have been different from original projections by CBO in 2001 affecting federal receipts ▪ Recession in 2009 is a factor but not a big one, CBO projections for 2010 GDP level and actual were very close ▪ Exceeded 100 billion in 2002, 2003, 2009, and 2010

What Caused the Budget Deficit? C. Technical changes ▪ When actual outcomes are different from technical assumptions underlying CBO projections ▪ Ex: More beneficiaries take up benefits or more tax payers claim a credit ▪ 434 billion of shift to deficit in 2010 (40 billion to Fannie Mae and Freddie Mac)

Conclusion ▪ Reduction of deficit will not happen through a reduction in discretionary spending (including defense and non-defense spending). Only reduce the deficit by 1% of GDP by 2018 ▪ Long term projection of budget deficits are a result of growth in elderly entitlement spending but restricting growth of entitlement programs alone will not deal with the deficit problem. Gradual changes to entitlement programs result in modest deficit reduction in the short run because it exempts current retirees and elderly people

Conclusion ▪ Even in the absence of other changes, legislative changes were the most contributing factor to the deficits. However legislation to reduce the deficit has been offset by other legislation to motivate the economy that increase the deficit. ▪ Example: In 111 th Congress, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 increased the deficit by an estimated 374 billion in 2011 (204 billion attributable to extension of expiring tax provisions) ▪ In 112 th Congress, the Department of Defense and Full Year Continuing Appropriations Act of 2011 reduces discretionary spending 2011 by 10 billion

My synopsis What about using our wealth to pay our debt : Oil, Gold and other natural resources On a global perspective, how bad is the USA? Deficits are not party specific Do not ask me difficult questions Despite how bad things are in the USA in terms of debt and the future economic prospects, many people would prefer to live in the USA than in their home countries, me included USA!