1

Chapter 17 Federal Deficits,

Surpluses, and the National Debt

• Key Concepts• Summary• Practice Quiz

©2004 Thomson/South-Western

2

What is the purpose of this chapter?

To take a closer look at the actual budgetary process that creates and finances our national debt

3

What are the four stages of the budget process?• Formation of the budget• Presidential budget submission

• First budget resolution• Budget passed

4

What is thefederal fiscal year?

October 1 through September 30

5

What is thefederal deficit?

How much money the government borrows in any given fiscal year

6

What is thenational debt?

The total amount owed by the federal government to owners of government securities

7

How does the U.S. Treasury

borrow money?By selling Treasury bills, notes, and bonds, promising to make specified interest payments and to repay the loaned funds on a given date

8

$800

Federal Expenditures and Tax Revenues

Bill

ion

s o

f d

olla

rs

$1000

$2,200

$1200$1400$1,600$1,800$2,000

Expenditures

Revenues

65 70 75 80 85 90 95 00 05

Year

9

17Year

Per

cen

tag

e o

f G

DP

18

24

1920212223

1985 1990 1995 00

Federal Expenditures, Revenues, and Deficits as a Percentage of GDP

Federal Deficit

Federal Surplus

10

What is a debt ceiling?

The legislated legal limit on the national debt

11

What usually happens when the debt pushes

against the ceiling?Congress raises the ceiling to accommodate the budget deficit

12

0540 50 60 70 80 90

Year$1

$2

$3

$4

$5

$6

National debt

The National Debt

00

Tri

llio

ns

of

do

llars

1305

Year20406080

100National debt/GDP

120140150

Per

cen

tag

e o

f G

DP

The National Debt as a Percentage of GDP

40 50 60 70 80 90 00

14

What is the internal national debt?

The portion of the national debt owed to a nation’s own citizens

15

What is the external national debt?

The portion of the national debt owed to foreign citizens

160550 60 70 80 90 00

.05%1.0%1.5%2.0%2.5%3.0%3.5%4.0%

Federal Net Interest as a Percentage of GDP

Year

Per

cen

tag

e o

f G

DP

17

Ownership of the National Debt2001

21%

27%

52%

Public Sector

Private Sector

Foreigners

18

What is the crowding-out effect?

When federal government borrowing increases interest rates, the result is lower consumption and investments

19

Can the government go bankrupt?

• Yes, it’s possible• No, the debt need never be paid off

20

Are we passing the debt burden to our children?

Yes, especially if it continues to increase

No, not as long as the debt is internally owned

21

Does government borrowing crowd out

private-sector spending?

Yes, the more the government borrows the less loanable funds for everyone else

No, especially if it occurs during economic downturns

22

200

150

50

2 4 6 8

AD1

AS

AD`2100

12

AD2

E2

E1

E`2

Full employment

Complete (AD1), Partial (AD`2), and Zero (AD2) Crowding Out

23

Key Concepts

24

Key Concepts• What is the federal deficit?• What is the national debt?• How does the U.S. Treasury borrow money?• What has been done to curb the national debt?• What is a debt ceiling?• What is the internal national debt?• What is the external national debt?• What is the crowding-out effect?• Can the government go bankrupt?• Are we passing the debt burden to our children?• Does government borrowing crowd out private-

sector spending?

25

Summary

26

The national debt is the dollar amount that the federal government owes holders of government securities. It is the cumulative sum of past deficits.

27

The U.S. Treasury issues government securities to finance the deficits. The debt has more than tripled since 1980. The debt ceiling is a method to restrict the national debt.

28

0540 50 60 70 80 90

Year$1

$2

$3

$4

$5

$6

National debt

The National Debt

00

Tri

llio

ns

of

do

llars

29

Internal national debt is the percentage of the national debt a nation owes to its own citizens.

30

External debt is a burden because it is the portion of the national debt a nation owes to foreigners.

31

Ownership of the National Debt2001

21%

27%

52%

Public Sector

Private Sector

Foreigners

32

The crowding-out effect is a burden of the national debt that occurs when the government borrows to finance its deficit, causing the interest rate to rise. As the interest rate rises, consumption and business investment fall.

33

Can Uncle Sam go bankrupt?

The U.S. government will not go bankrupt because it never has to pay off its debt. When government securities mature, the U.S. Treasury can refinance or roll over the debt by issuing new securities.

34

Are we passing the debt burden to our children? There are two differing opinions on this question.

35

Are we passing the debt burden to our children? No

One side of this argument is that the debt is mostly internal, so financing a deficit only involves exchanging old bonds for new bonds among U.S. citizens.

36

Are we passing the debt burden to our children? Yes

The sizeable external debt transfers purchasing power to foreigners.

37

Does government borrowing crowd out private sector spending?

Keynesian theory assumes zero crowding out when the federal government increases spending in order to shift the aggregate demand curve rightward.

38

END