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CWU ECON 101 - Chapter 14 Federal Deficits, Surpluses, and the National Debt

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Chapter 14 Federal Deficits, Surpluses, and the National DebtChapter OutlineYou Are HereSurpluses, Deficits, and the Debt: DefinitionsOff vs. On BudgetHistory of Deficits, Surpluses, and the National DebtAccounting for InflationReal Deficit/SurplusDebt and the Ability to Pay ItDeficit/GDPSurpluses of the late 1990sHow Economists See the Deficit and DebtThe Debt as a Percentage of GDPInternational Comparisons Debt as a % of GDPGenerational AccountingWho Owns The DebtWho Holds Federal DebtExternally Held DebtA Balance Budget AmendmentFigure 5 Built-In StabilizersProjections for the FutureCBO ProjectionsChapter 14Federal Deficits, Surpluses, and the National DebtCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin14-2Chapter Outline•Surpluses, Deficits, and the Debt: Definition and History•How Economists See the Debt•Who Owns the Debt•A Balanced Budget Amendment•Projections of the Future14-3You Are Here14-4Surpluses, Deficits, and the Debt: Definitions•Budget Deficit: the amount by which expenditures exceed revenues•Budget Surplus: the amount by which revenues exceed expenditures•National Debt: the total amount owed by the federal government14-5Off vs. On Budget•Off-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.14-6History of Deficits, Surpluses, and the National Debt•Revolutionary War debt $75 million•Closest budget to balance (no deficit or surplus) was $3800 in 1835•There were more years of surplus than deficit between 1791 and 1836 resulting in a national debt of only $37,000•Civil War debt reached $2 billion•From 1865 to 1930 the debt reached $50 billion•By 1946 (the end of WWII) the debt was $250 billion•By 2009 the debt was $13 trillion14-7Accounting for Inflation•All 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 dollars14-8Real Deficit/Surplus14-9Debt and the Ability to Pay It•Economists 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 ratio14-10Deficit/GDP14-11Surpluses of the late 1990s•Surpluses were generated over the late 1990s as a result of–High GDP growth that resulted in high tax revenues–Peace Dividend: money that was freed up for other spending priorities when the Cold War was over–Rapid increases in capital gains tax revenue from a booming stock market14-12How Economists See the Deficit and Debt•Separating the Operating and Capital Budgets–Operating Budget: part of the federal budget devoted to spending on goods and services that will be used in the current year–Capital Budget: part of the federal budget devoted to spending on goods that will last several years•Separating Cyclical and Structural Deficits–Cyclical Deficit: That part of the deficit attributable to the economy’s not being at full employment–Structural Deficit: That part of the deficit that would remain even if the economy were at full employment–Functional Finance: that part of the deficit attributable to the “stimulus package” useful and label it functional finance.14-13The Debt as a Percentage of GDP14-14International Comparisons Debt as a % of GDPCanadaUS UK GermanyItaly Japan1970 54.1 44.5 78.0 17.5 38.0 10.61975 44.9 42.8 62.1 23.1 57.4 20.21980 45.6 39.8 54.5 30.2 58.0 47.91985 66.3 53.5 59.4 41.6 82.1 64.21990 73.5 60.9 39.1 42.0 103.7 61.41995 99.2 68.3 58.9 59.1 123.1 76.02000 81.8 57.9 41.2 60.4 123.9 142.32001 81.4 54.6 50.7 57.8 108.3 118.62002 77.7 60.2 41.5 62.9 122.6 149.42005 70.3 62.4 46.5 71.1 120.5 177.32006 68.1 61.9 46.6 69.3 118.7 179.714-15Generational Accounting•A 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 receive•If 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.14-16Who Owns The Debt•Public–US investors –Foreign investors•Trust Funds–Social Security–Medicare•Federal Reserve–The Fed buys Federal Debt as a means of getting new money into the money supply.14-17Who Holds Federal Debt14-18Externally Held Debt14-19A Balance Budget Amendment•Proponents 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 worse14-20Figure 5 Built-In StabilizersRGDPASPrice LevelAD1RGDPASPrice LevelAD1AD3AD2AD2AD314-21Projections for the Future•The 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 because–They 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.14-22CBO


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CWU ECON 101 - Chapter 14 Federal Deficits, Surpluses, and the National Debt

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