1 federal deficits, surpluses and the national debt economics for today by irvin tucker, 6 th...
TRANSCRIPT
1
Federal Deficits, Surpluses and the
National Debt
Economics for Today by Irvin Tucker, 6th edition©2009 South-Western College Publishing
2
What will I learn in this chapter?
How the budgetary process formulates and finances our national debt
3
What puzzles will I learn to solve?
Can Uncle Sam go bankrupt?How does the national debt of
the U.S. compare to the debt of other countries?
Are we passing the debt burden to our children ?
Who owns the national debt?
4
What are the four stages of the budget process?• Formation of the budget• Presidential budget
submission• Budget resolution• Budget passed
5
What is thefederal fiscal year?
October 1 through September 30
6
What is thefederal deficit?
How much money the government borrows in any given fiscal year
7
What is thenational debt?
Amount owed by the federal government to owners of government securities
8
How does the U.S. Treasury borrow money?By selling securities promising to make interest payments and to repay on a given date
9
Federal Expenditures and Tax Revenues
$2,000
$400
$800
$1,200
$1,600
1070 75 80 85 90 95 00 05
$2,400
$2,800B
illio
ns
of
do
llars
Revenues
Expenditures
10
-150-100
+200
-500
+50+100+150
$+250
1070 75 80 85 90 95 00 05
Federal Budget Surpluses and Deficits
Bill
ion
s o
f d
olla
rs
-200-250-300-350-400-450-500-550
Deficit
11
What is the net public debt?
National debt minus all government inter-agency borrowing
12
17
Per
cen
tag
e o
f G
DP
18
24
19
20
21
22
23
1985 1990 2000 2005
Federal Expenditures and Tax Revenues
Deficit
Deficit
Surplus
Deficit
13
What has been done to curb the national debt?
• Tax increase• Spending caps• Debt ceiling
14
What happened to taxes in 1993?
• Raised the highest marginal tax rate from 31% to 36%
• Increased tax on gasoline by 4.3 cents per gallon
15
What happened to spending in 1993?
Reduced military spending and and cut some entitlements, including Medicare, Medicaid, and food stamps
16
What is the Balanced Act of 1997?
The act continued mandatory limits on spending and taxes
17
What happened between 2004 and 2006?
Tax revenues as a percentage of GDP grew, while expenditures as a percentage of GDP remained constant
18
What is a debt ceiling?
The legislated legal limit on the national debt
19
What usually happens when the debt pushes
against the ceiling?Congress raises the ceiling to accommodate the budget deficit
20
$2
$3
$4
$5
$6
$7
05 1060 70 80 90 00
Tri
llio
ns
of
do
llar
s$8
The National Debt
21
05
20
40
60
80
100
120
140
The National Debt as a Percentage of GDP
50 60 70 80 90 00
Per
cen
tag
e o
f G
DP
22
What is the internal national debt?
The portion of the national debt owed to a nation’s own citizens
23
What is the external national debt?
The portion of the national debt owed to foreign citizens
24
CanadaFrance SwedenU.S. AustraliaGermany U.K.Japan
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50
75
100
125
150
175
Italy
176%
121%
75%71% 68%
65%56%
48%
15%
25
05 1060 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, 1940-2006P
erce
nta
ge
of
GD
P
26
Ownership of the National Debt, 2006
Public Sector
Private Sector
Foreigners
27
What is the crowding-out effect?
When federal government borrowing increases interest rates, the result is lower consumption and investments
28
Can Uncle Sam go bankrupt?
• Yes, it’s possible• No, the debt need never be paid off
29
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
30
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
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200
150
50
2 4 6 8
AD1
AS
AD2
100
12
AD2
E2
E1
E2
full employment
Zero, Partial, and Complete Crowding Out
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Govt. spends and borrows
Govt. competes with private borrowers
Interest rates rise
Consumers and business spending decrease
AD and real GDP increase
dampened
33
END