32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run...
Transcript of 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run...
![Page 1: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/1.jpg)
S E C T I O N 9 F I S C A L P O L I C Y
32 30 Fiscal Policy Basics
31 Fiscal Policy and the Multiplier
32 Budget Deficits and Public Debt
![Page 2: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/2.jpg)
• The budget balance is the difference between the government’s tax revenue and its spending both on goods and services and on government transfers.
• Other things equal, discretionary expansionary fiscal
policies—increased government purchases of goods and services, higher government transfers, or lower taxes—reduce the budget balance.
The Budget Balance
Slide 2
![Page 3: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/3.jpg)
The Budget Balance
• Expansionary fiscal policies make a budget surplus smaller or a budget deficit bigger.
• Conversely, contractionary fiscal policies—smaller government purchases of goods and services, smaller government transfers, or higher taxes—increase the budget balance, making a budget surplus bigger or a budget deficit smaller.
Slide 3
![Page 4: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/4.jpg)
The Budget Balance • Some of the fluctuations in the budget balance are
due to the effects of the business cycle.
• In order to separate the effects of the business cycle from the effects of discretionary fiscal policy, governments estimate the cyclically adjusted budget balance.
• The cyclically adjusted budget balance is an estimate of the budget balance if the economy were at potential output.
Slide 4
![Page 5: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/5.jpg)
The Budget Balance
Slide 5
The budget deficit as a percentage of GDP tends to rise during recessions (indicated by shaded areas) and fall during expansions.
![Page 6: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/6.jpg)
The Budget Balance
Slide 6
The budget deficit as a percentage of GDP moves closely in tandem with the unemployment rate.
![Page 7: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/7.jpg)
The Budget Balance Slide 7
![Page 8: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/8.jpg)
Should the Budget Be Balanced? • Most economists don’t believe the government
should be forced to run a balanced budget every year because this would undermine the role of taxes and transfers as automatic stabilizers.
• Yet, policy makers concerned about excessive deficits sometimes feel that rigid rules prohibiting—or at least setting an upper limit on—deficits are a good idea.
Slide 8
![Page 9: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/9.jpg)
Long-Run Implications of Fiscal Policy • U.S. government budget accounting is calculated on
the basis of fiscal years.
• A fiscal year runs from October 1 to September 30 and is labeled according to the calendar year in which it ends.
• Persistent budget deficits have long-run consequences because they lead to an increase in public debt.
Slide 9
![Page 10: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/10.jpg)
Greek and German Long-Term Interest Rates
Slide 10
![Page 11: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/11.jpg)
Problems Posed by Rising Government Debt • Public debt may “crowd out” investment spending,
which reduces long-run economic growth.
• And in extreme cases, rising debt may lead to government default, resulting in economic and financial turmoil.
• Can’t a government just print money to pay its bills?
• Yes, but this leads to another serious problem: inflation!
Slide 11
![Page 12: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/12.jpg)
Deficits and Debt in Practice • A widely used measure of fiscal health is the debt–
GDP ratio. • This number can remain stable in the face of
moderate budget deficits if GDP rises over time.
Slide 12
![Page 13: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/13.jpg)
U.S. Federal Deficits and Debt
Slide 13
![Page 14: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/14.jpg)
U.S. Federal Deficits and Debt
Slide 14
![Page 15: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/15.jpg)
Implicit Liabilities and Capital Budgeting
• Implicit liabilities are spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics.
• Some have argued in favor of capital budgeting, a budget procedure that accounts for assets as well as liabilities. However, capital budgeting is less transparent.
Slide 15
![Page 16: 32 Budget Deficits and Public Debt · 2018. 8. 23. · Persistent budget deficits have long- run consequences because they lead to an increase in public debt. Slide 9 . Greek and](https://reader036.fdocuments.net/reader036/viewer/2022071409/610259ab10bcd21bc601bb5f/html5/thumbnails/16.jpg)
Future Demands on the Federal Budget
Slide 16