Download 12-4

Long-Run Implications of
Fiscal Policy
Chapter 12-4
Defining Surpluses and Debt
• A surplus is an excess of revenues over
payments.
• A deficit is a shortfall of revenues over
payments.
The Definition of Debt and
Assets
• Debt is accumulated deficits minus
accumulated surpluses.
• Deficits and surpluses are flow concepts.
• Debt is a stock concept.
Long-Run Implications


U.S. government budget accounting
is calculated on the basis of fiscal
years.
Persistent budget deficits have longrun consequences because they lead
to an increase in public debt.
A String of Deficits
Budget Surpluses
Budget Deficits
1970 19721974 19761978 1980 1982 19841986 1988 19901992 1994 1996 1998 2000 2002
Always in Debt
• 1835-36: Debt Free! – The U.S. was
completely out of debt by 1835.
• The Mexican-American War (1846-48)
caused a four-fold increase in the debt
Debt as a Percentage of
GDP
100%
75
50
25
0
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Problems of Rising Debt
This can be a problem for two reasons:
1.
Public debt may crowd out investment
spending, which reduces long-run
economic growth.
2.
And in extreme cases, rising debt may
lead to government default, resulting in
economic and financial turmoil.
Deficits and Debt in
Practice
• A widely used measure of fiscal health is
the debt–GDP ratio. This number can
remain stable or fall even in the face of
moderate budget deficits if GDP rises
over time.
• Debt relative to GDP provide a measure
of a country’s ability to pay off or service
its debt.
Government Debt as a Percentage of
GDP
U.S. Federal Deficit since 1939
The debt–GDP ratio is government
debt as a percentage of GDP.
The Federal Debt–GDP Ratio Since
1939
Japanese Deficits and Debt
Debt/GDP
• debt–GDP ratio can fall, even when debt
is rising, as long as GDP grows faster
than debt
• debt–GDP ratio will rise if debt grows
faster than GDP
The Debt Burden
• Most of the decrease in the U.S. debt-toGDP ratio occurred through growth in
GDP.
• When GDP grows, the government can
reasonably handle more debt.
Who do we owe?
• Public Debt is government debt held by
individual and institutions outside the
government.
• Big part of the Government debt is owned
by the Government!
– It owes money to itself?
Debt
Foreign
individuals and
firms (25%)
U.S.
government
agencies (42%)
U.S. individuals
and firms (24%)
Federal Reserve
(9%)
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Implicit Liabilities
• Implicit liabilities are spending
promises made by governments that are
effectively a debt despite the fact that
they are not included in the usual debt
statistics.
Gross Debt
• Gross Debt = Public Debt + implicit
liabilities
• A more accurate indicator of Government
Fiscal health
The Implicit Liabilities of the U.S.
Government
Can The Government Go
Bankrupt?
• A complicated question
• Dr. Krugman seems to worry
about it but…
Difference Between Individual
and Government Debt
• Government debt is different from an
individual’s debt for the following reasons:
– Government debt is ongoing – it does not
die.
– Government can print money to pay off its
debt – individuals can’t.
• This usually leads to inflation
• Your text talks about this on p310 but moves on
fast
Will the debt make us
poorer?
Do you remember that every Liability is an
Asset to someone else?
Difference Between Individual
and Government Debt***
• Paying interest on the internal debt
involves a redistribution among citizens of
the country.
• It does not involves a net reduction in
income of the average citizen.
Difference Between Individual
and Government Debt**
• External debt (Debt owed to foreigners) is
more like an individual’s debt.
• External debt – government debt owed
to individuals in foreign countries.
So can the Gov. go broke?
• That is our question for the one minute
paper!