Slide 1CHAPTER OUTLINESurpluses, 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 Debt?Who Holds Federal Debt?Externally Held DebtA Balance Budget AmendmentFigure 5 Built-In StabilizersProjections for the FutureCBO Projections12-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 12Federal Deficits, Surpluses, and the National Debt12-2©2015 McGraw-Hill Education. All Rights Reserved CHAPTER OUTLINE•Surpluses, Deficits, and the Debt: Definitions and History•How Economists See the Deficit and the Debt•Who Owns the Debt?•A Balanced Budget Amendment•Projections12-3©2015 McGraw-Hill Education. All Rights Reserved Surpluses, 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 government12-4©2015 McGraw-Hill Education. All Rights Reserved Off 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.12-5©2015 McGraw-Hill Education. All Rights Reserved History 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 2014 the debt was $16 trillion12-6©2015 McGraw-Hill Education. All Rights Reserved Accounting 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 dollars12-7©2015 McGraw-Hill Education. All Rights Reserved Real Deficit/SurplusYear19421945194819511954195719601963196619691972197519781981198419871990199319961999200220052008201120142017-1200-1000-800-600-400-2000200400Off-Budget Total Off-Budget est. Total est.12-8©2015 McGraw-Hill Education. All Rights Reserved Debt 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 ratio12-9©2015 McGraw-Hill Education. All Rights Reserved Deficit/GDP19431945194719491951195319551957195919611963196519671969197119731975197719791981198319851987198919911993199519971999200120032005200720092011201320152017-35%-30%-25%-20%-15%-10%-5%0%5%10%Deficit/GDPYearDeficit/GDP12-10©2015 McGraw-Hill Education. All Rights Reserved Surpluses 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 market12-11©2015 McGraw-Hill Education. All Rights Reserved How 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.12-12©2015 McGraw-Hill Education. All Rights Reserved The Debt as a Percentage of GDP194019431946194919521955195819611964196719701973197619791982198519881991199419972000200320062009201220150%20%40%60%80%100%120%140%Publicly held debt Total debt Total Debt (est) Publically Held Debt (est)YearDebt/GDP12-13©2015 McGraw-Hill Education. All Rights Reserved International Comparisons Debt as a % of GDPCanada US 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 60.4 123.9 142.32005 70.3 62.4 46.5 71.1 120.5 177.32010 84.4 92.8 81.3 79.9 131.3 198.42013 85.5 113.0 110.4 86.2 129.6 224.312-14©2015 McGraw-Hill Education. All Rights Reserved Generational 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.12-15©2015 McGraw-Hill Education. All Rights Reserved Who 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.12-16©2015 McGraw-Hill Education. All Rights Reserved Who Holds Federal Debt?0%10%20%30%40%50%60%70%80%90%Trust funds Federal reserve Public (non-Fed)YearPerce ntage fede r a l de bt12-17©2015 McGraw-Hill Education. All Rights Reserved Externally Held Debt2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201105001000150020002500Japan Mainland China United Kingdom Caribbean Banking Centers All Others OPECYearA m o u n t o f U . S . Tre a su ry (b i ll i o n s)12-18©2015 McGraw-Hill Education. All Rights Reserved A 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