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Chapter 17
Federal Deficits and
the National Debt
• Key Concepts
• Summary
©2000 South-Western College Publishing
1
What is the purpose
of this chapter?
To take a closer look at the
actual budgetary process
that creates and finances
our national debt
2
What are the four stages
of the budget process?
• Formation of the budget
• Presidential budget submission
• Budget resolution
• Budget passed
3
Formation of Budget
February – December
(previous year)
Presidential Budget Submission
January
Budget Resolution
May
Budget Passed
September
4
What is the
federal fiscal year?
October 1 through
September 30
5
What is the
federal deficit?
How much money the
government borrows in
any given fiscal year
6
What is the
national debt?
The total amount owed by
the federal government
to owners of government
securities
7
How does the U.S.
treasury borrow money?
By selling Treasury bills,
notes, and bonds, promising
to make specified interest
payments and to repay the
loaned funds on a given date
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Federal Expenditures and Tax Revenues
Billions of dollars
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
Expenditures
Revenues
Year
60 65 70 75 80 85 90 95 00
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Percentage of GDP
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23
22
21
20
19
18
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Federal Expenditures, Revenues, and
Deficits as a Percentage of GDP
Federal
Deficit
Year
1985
1990
1995
2000
10
$+100
Surplus
0
$-200
$-300
Billions of dollars
$-100
Deficit
60
Federal Budget
Surpluses and Deficits
65 70
75 80 85
90
95 00
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What is a debt ceiling?
The legislated legal limit
on the national debt
12
What usually happens
when the debt pushes
against the ceiling?
Congress raises the
ceiling to accommodate
the budget deficit
13
The National Debt
$5
$4
$3
$2
Trillions of dollars
$6
National debt
$1
30
Year
40
50
60
70
80
90 00
14
Percentage of GDP
150
140
120
100
80
60
40
20
The National Debt as
a Percentage of GDP
World War II
National debt/GDP
Year
30
40
50
60
70
80
90
00
15
What is the internal
national debt?
The portion of the
national debt owed to a
nation’s own citizens
16
What is the external
national debt?
The portion of the
national debt owed
to foreign citizens
17
140%
An International Comparison
of National Debt Ratios as a percentage of
GDP, 1998
120%
100%
80%
60%
40%
Italy
Canada
Japan
U.S.
Germany
France
U.K.
20%
0%
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Percentage of GDP
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
.05%
Federal Net Interest as a
Percentage of GDP
40
Year
50
60
70
80
90
00
19
Ownership of the National Debt
1999
18%
Public Sector
36%
Private Sector
46%
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
21
Can the government
go bankrupt?
• Yes, it’s possible
• No, the debt need never
be paid off
22
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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Complete (AD1), Partial (AD`2),
and Zero (AD2) Crowding Out
AS
200
E`2
150
AD2
E1
100
50
E2
Full Employment
2
4
AD1
6
AD`2
8
12
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Government spends & borrows
Government competes with private borrowers
Interest rates rise
Consumer & business spending decrease
AD and real GDP increase dampened
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Key Concepts
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Key Concepts
• What is the Federal Deficit?
• What is the National Debt?
• How does the U.S. Treasury borrow
money?
• What has been done to curb the National
Debt?
• What is a Debt Ceiling?
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Key Concepts cont.
•
•
•
•
•
What is the Internal National Debt?
What is the External National Debt?
What is the Crowding-out Effect?
Can the Government go Bankrupt?
Are we passing the Debt Burden to our
Children?
• Does Government Borrowing Crowd Out
Private-sector Spending?
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Summary
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The national debt is the dollar
amount that the federal government
owes holders of government
securities. It is the cumulative sum
of past deficits. The U.S. Treasury
issues government securities to
finance the deficits. The debt has
more than tripled since 1980. The
debt ceiling is a method to restrict
the national debt.
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The National Debt
$5
$4
$3
$2
Trillions of dollars
$6
National debt
$1
30
Year
40
50
60
70
80
90 00
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Internal national debt is the
percentage of the national debt a
nation owes to its own citizens. In
1998, abut 83% of the national
debt was internally held by
individuals, banks, corporations,
insurance companies, and
government entities. The “we owe
it to ourselves” argument over the
debt is the U.S. citizens own the
bulk of the national debt.
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External debt is a burden
because it is the portion of the
national debt a nation owes to
foreigners. The interest paid on
external debt transfers purchasing
power to other nations. In 1998,
approximately 17% of the national
debt was external.
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Ownership of the National Debt
1999
18%
Public Sector
36%
Private Sector
46%
Foreigners
35
The crowding-out effect is a
burden of the national debt that
occurs when the government
borrows to finance its deficit,
causing the interest rate to rise. As
the interest rate rises, consumption
and business investment fall.
The burden of debt debate involves
controversial questions:
36
Can Uncle Sam GO Bankrupt?
The national debt is a lower
percentage of GDP today than at the
end of World War II. The U.S.
government will not go bankrupt
because it never has to pay off its
debt. When government securities
mature, the U.S. Treasury can
refinance or roll over the debt by
issuing new securities.
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Are We Passing the Debt Burden to
Our Children? NO
One side of this argument is that the
debt is mostly internal, so financing a
deficit only involves exchanging old
bonds for new bonds among U.S.
citizens. The burden of the debt falls
only on the current generation when the
trade-off between public-sector goods
and private sector goods along the
production possibilities curve occurs.
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Are We Passing the Debt Burden
to Our Children? YES
The sizeable external debt transfers
purchasing power to foreigners.
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Does Government Borrowing Crowd
Out Private Sector Spending?
Keynesian theory assumes zero crowding
out when the federal government
increases spending in order to shift the
aggregate demand curve rightward. If
crowding out occurs, reduced private
spending offsets the multiplier effect of
increased government spending. As a
result, the expected magnitude of the
rightward shift in the aggregate demand
curve is partially or completely offset.
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END
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