CHAPTER 18: DEFICITS, SURPLUSES AND THE PUBLIC DEBT

DEFICITS, SURPLUSES AND DEBT: DEFINITIONS

Budget Deficit – is the amount by which government expenditures exceed government revenues in a given year.

Budget Surplus – is the amount by which government revenues exceed government expenditures in a given year.

Public debt – is essentially the total accumulation of the deficits the Federal government has incurred through time.

BUDGET PHILOSOPHIES

• Annually Balanced Budget – is not economically neutral; the pursuit of such a policy may intensify the business cycle, not dampen it.

• Cyclically Balanced Budget – The equality of government expenditures and net tax collections over the course of a business cycle; deficits incurred during periods of recession are effect by surpluses obtained during periods of prosperity.

•  Functional Finance – the use of fiscal policy to achieve a noninflationary gross domestic product without regard to the effect on the public debt.

THE PUBLIC DEBT: FACTS AND FIGURES

• Causes

·         Wars

·         Recessions

·         Lack of Fiscal Discipline

• Quantitative Aspects

·         Debt and GDP

·         International Comparisons

·         Interest Charges

·         Ownership

• Social Security Considerations

Social Security – is basically a “pay-as-you-go” plan which the mandated benefits paid out each year are financed by the payroll tax revenues received each year.

FALSE CONCERNS

• Bankruptcy

There are two main reasons:

·         Refinancing

·         Taxation

SUBSTANTIVE ISSUES

·         Income Distribution

·         Incentives

·         Foreign-owned Public Debt

• Crowding Out and the Stock of Capital

2 Factors that reduce the net economic burden shifted to future generations:

·         Public Investment

·         Public-private complementarities

• What To Do With The Surpluses?

·         Pay down the public debt

·         Cut taxes

·         Increase federal expenditures