Chapter 10 Federal Deficits, Surpluses, and the National Debt

Chapter 10Federal Deficits, Surpluses, and the National DebtChapter OutlineSurpluses, Deficits, and the Debt: Definition and HistoryHow Economists See the DebtWho Owns the DebtA Balanced Budget AmendmentProjections of the FutureSurpluses, Deficits, and the Debt: DefinitionsBudget Deficit: the amount by which expenditures exceed revenuesBudget Surplus: the amount by which revenues exceed expendituresNational Debt: the total amount owed by the federal governmentOff vs. On BudgetOff-budget: parts of the budget designated by Congress as separate from the normal budget. Programs that operate with their own revenue sources and have trust funds; Social Security, Medicare, and the Post Office are examples.On-budget: parts of the budget that rely entirely or mostly on general revenue.History of Deficits, Surpluses, and the National DebtRevolutionary War debt $75 millionClosest budget to balance (no deficit or surplus) was $3800 in 1835There were more years of surplus than deficit between 1791 and 1836 resulting in a national debt of only $37,000Civil War debt reached $2 billionFrom 1865 to 1930 the debt reached $50 billionBy 1946 (the end of WWII) the debt was $250 billionBy 2000 the debt was $5.6 trillionAccounting for InflationAll figures for deficits, surpluses, and the national debt must be adjusted for inflation. The Real Deficit or Real Surplus measures the deficit or surplus in constant dollarsReal Deficit/SurplusDebt and the Ability to Pay ItEconomists insist that the absolute magnitude of the debt is less important than a nation’s ability to pay it.The measure that does this is the Deficit/GDP ratioDeficit/GDPSurpluses of the late 1990sSurpluses were generated over the late 1990s as a result ofHigh GDP growth that resulted in high tax revenuesPeace Dividend: money that was freed up for other spending priorities when the Cold War was overRapid increases in capital gains tax revenue from a booming stock marketHow Economists See the Deficit and DebtSeparating the Operating and Capital BudgetsOperating Budget: part of the federal budget devoted to spending on goods and services that will be used in the current yearCapital Budget: part of the federal budget devoted to spending on goods that will last several yearsSeparating Cyclical and Structural DeficitsCyclical Deficit: That part of the deficit attributable to the economy’s not being at full employmentStructural Deficit: That part of the deficit that would remain even if the economy were at full employmentThe Debt as a Percentage of GDPInternational ComparisonsDebt as a % of GDPCanadaUSUKGermanyItalyJapan197054.144.578.017.538.010.6197544.942.862.123.157.420.2198045.639.854.530.258.047.9198566.353.559.441.682.164.2199073.560.939.142.0103.761.4199599.268.358.959.1123.176.0200082.557.151.261.7115.2114.1Generational AccountingA method of analysis that computes a net tax rate that accounts for the taxes that each generation will pay compared to the services and transfers they will receiveIf government runs a deficit in one generation to finance a project where the benefits accrue to a later generation that is paying the interest on that debt then the net tax rate does not change.Who Owns The DebtPublicUS investors Foreign investorsTrust FundsSocial SecurityMedicareFederal ReserveThe Fed buys Federal Debt as a means of getting new money into the money supply.Who Holds Federal DebtA Balance Budget AmendmentProponents argue that a BBA is necessary to keep a current generation from borrowing more than is optimal.A majority of economists do not favor such an amendment because it would be Procyclical good times would be even better and bad times even worseFigure 5 Built-In StabilizersRGDPASPrice LevelAD1RGDPASPrice LevelAD1AD3AD2AD2AD3Projections for the FutureThe Office of Management and Budget (in the White House) and the Congressional Budget Office each produce a projection of the 10 year budget picture using assumptions of economic growth.These projections are rarely accurate beyond the near term becauseThey often are based on the assumption that Congress will not change current law.They are quite sensitive to small changes in the performance of the economy.