principles of macroeconomics lecture 8 deficits, surpluses, & the public debt
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PRINCIPLES OF MACROECONOMICSLECTURE 8
Deficits, Surpluses, & the Public Debt
Deficits, Surpluses, & the Public Debt
In this chapter you will learn
What a budget deficit and a budget surplus are, and their connection to the public debt
The misconceptions about budget deficits and the national debt
The substantive issues about budget deficits and the public debt
The effect of the recent budgetary surplus
Topics
Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the
Present Options for the Surpluses
Deficit & Debt: Definitions
Budget Deficit Annual amount by which government
expenditures exceed taxes E.g. 1996/97 deficit = $13.5 billionPublic Debt Accumulation of all past deficits E.g. 2000 public debt =$650 billion
Budget Philosophies
Annually Balanced Budget G = T every year Intensifies the cycle (pro-cyclical) Politically responsible?
Budget Philosophies
Cyclically Balanced Budget G = T over each business cycle Deficits in recessionary downswings Surpluses in inflationary upswings Counter-cyclical (stabilizes the cycle) Not workable in practice
Annually Balanced Budget
Budget Philosophies
Cyclically Balanced Budget
Annually Balanced Budget
Functional Finance– Balancing the budget is of secondary
importance– Primary focus is on stabilizing
economy (counter-cyclical policies)– May result in a large public debt
The Public Debt: Facts & Figures
Government of Canada Public Debt, selected years
0
100
200
300
400
500
600
700
1926
1929
1940
1946
1954
1960
1966
1969
1973
1975
1979
1983
1988
1991
1994
1997
2000
end of year
$ b
illi
on
s
0
20
40
60
80
100
120
140
160
% o
f G
DP
gross federal public debt (billions)
% of GDP
The Public Debt: Facts & Figures
Causes Wars Recessions Lack Of Political Will
The Public Debt: Facts & Figures
Quantitative Aspects Debt & GDP
relative size of the debt now decreasing International Comparisons
our debt has grown rapidly
The Public Debt: Facts & Figures
Quantitative Aspects Debt & GDP International Comparisons
Interest Charges– recently have begun to decline
The Public Debt: Facts & Figures
Quantitative Aspects Debt & GDP International Comparisons
Interest Charges Ownership
– foreign-owned debt an issue
The Public Debt: Facts & Figures
Quantitative Aspects Debt & GDP International Comparisons
Interest Charges Ownership Accounting & Inflation
Substantive Issues
Income Distribution Incentives External Debt Crowding Out & the Stock of Capital
Ig
Investment (billions of dollars)
Real in
tere
st
rate
(p
erc
en
t)
Increasing the debt mayput upward pressure oninterest rates. The higher interest rates may reduce private Investment (Ig)
16
14
12
10
8
6
4
2
05 10 15 20 25 30 35 40
The Crowding Out EffectFigure 11-2
15
The Crowding Out Effect
Qualifications Public Investment Public-Private Complementarities
Ig
Real in
tere
st
rate
(p
erc
en
t)16
14
12
10
8
6
4
2
05 10 15 20 25 30 35 40
The Crowding Out Effect
The crowding out effect may be partially offset by increased private investment, due to improvements in infrastructure
Investment (billions of dollars)
Figure 11-2
17
Deficits & Surpluses: 1990-2000 deficits were enormous during the early
1990s budget surpluses appeared in late 1990s surpluses expected to grow through the
2000s
Federal Budget Deficits & SurplusesFig. 11-3
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
$bill
ions
19
Source: Department of Finance
Annual budget deficits throughout most of the 1980s & the first half of the 1990s gave way to surpluses in the late
1990s
Annual budget deficits throughout most of the 1980s & the first half of the 1990s gave way to surpluses in the late
1990s
Options for the Surpluses
Paying Down the Public Debt Reduce Taxes Increase Public Expenditures Combinations of Policies
Topics
Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the
Present Options for the Surpluses