1 Federal Deficits, Surpluses and the National Debt Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College Publishing.

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

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What is thefederal deficit?

How much money the government borrows in any given fiscal year

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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

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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

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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

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What has been done to curb the national debt?

• Tax increase• Spending caps• Debt ceiling

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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

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What happened to spending in 1993?

Reduced military spending and and cut some entitlements, including Medicare, Medicaid, and food stamps

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What is the Balanced Act of 1997?

The act continued mandatory limits on spending and taxes

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What happened between 2004 and 2006?

Tax revenues as a percentage of GDP grew, while expenditures as a percentage of GDP remained constant

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What is a debt ceiling?

The legislated legal limit on the national debt

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What usually happens when the debt pushes

against the ceiling?Congress raises the ceiling to accommodate the budget deficit

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$2

$3

$4

$5

$6

$7

05 1060 70 80 90 00

Tri

llio

ns

of

do

llar

s$8

The National Debt

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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

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What is the internal national debt?

The portion of the national debt owed to a nation’s own citizens

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What is the external national debt?

The portion of the national debt owed to foreign citizens

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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

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Ownership of the National Debt, 2006

Public Sector

Private Sector

Foreigners

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What is the crowding-out effect?

When federal government borrowing increases interest rates, the result is lower consumption and investments

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Can Uncle Sam go bankrupt?

• Yes, it’s possible• No, the debt need never be paid off

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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

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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

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END