Chapter 18-Deficit Finance Public economics
1 Chapter 18 – Deficit Finance Public Economics
Introduction Besides taxation, the governments other major revenue source is borrowing In this lesson we will Discuss problems with measuring size of debt Who bears the burden of the debt When is borrowing a suitable way to finance government expenditure
2 Introduction • Besides taxation, the government’s other major revenue source is borrowing. • In this lesson, we will: – Discuss problems with measuring size of debt – Who bears the burden of the debt – When is borrowing a suitable way to finance government expenditure
How Big is the Debt? Definitions The deficit during a time period is the excess of spending over revenues The surplus during a time period is the excess oT revenues over spending Some items are off-budget, like the revenues and expenditures associated with Social Security
3 How Big is the Debt? • Definitions: – The deficit during a time period is the excess of spending over revenues – The surplus during a time period is the excess of revenues over spending • Some items are off-budget, like the revenues and expenditures associated with Social Security
How Big is the Debt? Thus, one could modify the terms to - On-budget deficit (surplus) Oif-budget deficit (surplus) In 2002, the on-budget deficit was $317.5 billion, while the off-budget surplus was $159.6 billion. This gives a total deficit of $.8 billion
4 How Big is the Debt? • Thus, one could modify the terms to: – On-budget deficit (surplus) – Off-budget deficit (surplus) • In 2002, the on-budget deficit was $317.5 billion, while the off-budget surplus was $159.6 billion. This gives a total deficit of $157.8 billion
How Big is the Debt? Table 18. 1 shows the total federal budget deficits(including off-budget items) for a number of years Both in absolute size Relative to GDP
5 How Big is the Debt? • Table 18.1 shows the total federal budget deficits (including off-budget items) for a number of years – Both in absolute size – Relative to GDP
Table 18.1 Table 18.1 Federal government de cits, 1970-2005 Total Total De cit( De cit(-) Fi ISCa or Surplus or Surplus Year (S billions) Percent of gDP 1970 0.3 1980 73.8 2.9 190 212.3 5.4 221.4 4.0 2000 236.4 2.4 2002 157.8 2005 73.0 0.6 *Projections SOURCE: Congressional Budget Of ce, The Economic and Budget Outlook: Fiscal Years 2004--2013, January 2003, pp. xvi, 148
Table 18.1
How Big is the Debt? Deficits have generally been the rule (although there was a surplus from 1998 to2001) Deficit(as fraction of GDP)was highest in mid-1980s
7 How Big is the Debt? • Deficits have generally been the rule (although there was a surplus from 1998 to 2001). • Deficit (as fraction of GDP) was highest in mid-1980s
How Big is the Debt? The debt at a given time is the sum of all past budget deficits Cumulative excess of past spending over past receipts When there is a deficit, debt goes up; when there is a surplus, debt goes down Debt is stock variable while deficit and surplus are flow variables
8 How Big is the Debt? • The debt at a given time is the sum of all past budget deficits. – Cumulative excess of past spending over past receipts. – When there is a deficit, debt goes up; when there is a surplus, debt goes down. – Debt is stock variable, while deficit and surplus are flow variables
How Big is the Debt? Federal debt at end of 2002 was $3,500,000000,000 That is, 3.5 trillion dollars
9 How Big is the Debt? • Federal debt at end of 2002 was: $3,500,000,000,000 • That is, 3.5 trillion dollars
How Big is the Debt? Putting the debt in perspective The $3.5 trillion debt was about 34 of gdP in 2002 It has always been a large share of current GDP See Table 18.2 Servicing the debt comprised 8.5% of federal outlays in 2002 10
10 How Big is the Debt? • Putting the debt in perspective – The $3.5 trillion debt was about 34% of GDP in 2002 – It has always been a large share of current GDP • See Table 18.2 • Servicing the debt comprised 8.5% of federal outlays in 2002
