1. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 1 Deficits, Surpluses, & the Public Debt SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

2. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 2 In this chapter you will learn 10.1 The definitions of budget surplus, budget deficit, the public debt, and the diverse budget philosophies 10.2 About the recent Canadian budget surpluses, deficits, and public debt 10.3 The misconceptions about budget deficits and the national debt 10.4 The substantive issues about budget deficits and the public debt 10.5 About recent budgetary surpluses

3. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 3 Chapter 10 Topics 10.1 Deficits, Surpluses & Debt: Definitions & Philosophies 10.2 The Public Debt: Facts & Figures 10.3 False Concerns 10.4 Substantive Issues 10.5 Deficits & Surpluses: 1990 to the Present

4. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 4 Deficit & Debt: Definitions Budget Deficit n Annual amount by which government expenditures exceed taxes n E.g. 1996-97 deficit = $13.5 billion Public Debt n Accumulation of all past deficits & surpluses n E.g. 2002 public debt =$640 billion

5. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 5 Budget Philosophies n Annually Balanced Budget –G = T every year –Intensifies the cycle (pro-cyclical) –Some believe this approach constrains an undesirable expansion of the public sector

6. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 6 Budget Philosophies n Cyclically Balanced Budget –G = T over each business cycle –Deficits in recessionary downswings –Surpluses in inflationary upswings –Counter-cyclical (stabilizes the cycle) –Not workable in practice n Annually Balanced Budget

7. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 7 Budget Philosophies n Cyclically Balanced Budget n Annually Balanced Budget n Functional Finance –Balancing the budget is of secondary importance –Primary focus is on stabilizing economy

8. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 8 Chapter 10 Topics 10.1 Deficits, Surpluses & Debt: Definitions & Philosophies 10.2 The Public Debt: Facts & Figures 10.3 False Concerns 10.4 Substantive Issues 10.5 Deficits & Surpluses: 1990 to the Present

9. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 9 The Public Debt : Facts & Figures

10. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 10 The Public Debt : Facts & Figures Causes n Wars n Recessions n Lack Of Political Will

11. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 11 The Public Debt : Facts & Figures Quantitative Aspects n Debt & GDP –relative size of the debt now decreasing n International Comparisons –our debt is 4 th highest as % of GDP among world’s industrialized nations

12. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 12 Global Perspective 10.1

13. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 13 The Public Debt : Facts & Figures Quantitative Aspects n Debt & GDP n International Comparisons n Interest Charges –recently have begun to decline (as % of GDP)

14. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 14 The Public Debt : Facts & Figures

15. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 15 The Public Debt : Facts & Figures Quantitative Aspects n Debt & GDP n International Comparisons n Interest Charges n Ownership –foreign-owned debt an issue

16. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 16 Figure 10-1

17. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 17 Chapter 10 Topics 10.1 Deficits, Surpluses & Debt: Definitions & Philosophies 10.2 The Public Debt: Facts & Figures 10.3 False Concerns 10.4 Substantive Issues 10.5 Deficits & Surpluses: 1990 to the Present

18. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 18 False Concerns n Bankruptcy –Refinancing –Taxation n Burdening Future Generations –Canada owes a substantial portion of the public debt to itself

19. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 19 Chapter 10 Topics 10.1 Deficits, Surpluses & Debt: Definitions & Philosophies 10.2 The Public Debt: Facts & Figures 10.3 False Concerns 10.4 Substantive Issues 10.5 Deficits & Surpluses: 1990 to the Present

20. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 20 Substantive Issues n Income Distribution n Incentives n External Debt n Crowding-Out & the Stock of Capital

21. IgIgIgIg Investment (billions of dollars) Real interest rate (percent) Increasing the debt may put upward pressure on interest rates. The higher interest rates may reduce private Investment (I g ) 16141210 8 6 4 2 0 5 10 15 20 25 30 35 40 The Crowding Out Effect Figure 10-2 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 21

22. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 22 The Crowding Out Effect Qualifications n Public investment n Public-private complementarities

23. IgIgIgIg Real interest rate (percent) 16141210 8 6 4 2 0 5 10 15 20 25 30 35 40 The Crowding Out Effect The crowding out effect may be partially offset by increased private investment, due to improvements in infrastructure Investment (billions of dollars) Figure 10-2 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 23

24. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 24 Chapter 10 Topics 10.1 Deficits, Surpluses & Debt: Definitions & Philosophies 10.2 The Public Debt: Facts & Figures 10.3 False Concerns 10.4 Substantive Issues 10.5 Deficits & Surpluses: 1990 to the Present

25. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 25 Deficits & Surpluses: 1990 to the Present n federal deficits & the debt were main focus of fiscal policy during first half of 1990s n from a deficit of $40 billion in 1993, cuts in spending & tax increases resulted in a surplus of $6 billion+ in 2003

26. Federal Budget Deficits & Surpluses (billions) © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 26

27. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 27 What to do with the Surpluses? n Pay Down the Public Debt n Reduce Taxes n Increase Public Expenditures n Combinations of Policies –Likely Directions

28. © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 28 Chapter 10 Topics 10.1 Deficits, Surpluses & Debt: Definitions & Philosophies 10.2 The Public Debt: Facts & Figures 10.3 False Concerns 10.4 Substantive Issues 10.5 Deficits & Surpluses: 1990 to the Present