Download
1 / 85
850 likes | 1.1k Vues
Politics, Surpluses, Deficits, and Debt. Chapter 12. Introduction. After having run budget deficits for many decades, in 1997 the federal government began to run budget surpluses. Introduction.
E N D
Politics, Surpluses, Deficits, and Debt Chapter 12
Introduction • After having run budget deficits for many decades, in 1997 the federal government began to run budget surpluses.
Introduction • In the long-run framework, surpluses are good because they provide additional saving for an economy. • Deficits are bad because they reduce saving, growth, and income.
Introduction • In a short-run framework, the view of surpluses and deficits depends on the state of the economy relative to its potential income.
Introduction • If the economy is running below its potential output, deficits are good and surpluses are bad. • Deficits increase expenditures, increasing output by a multiple of that amount.
Introduction • Combining the long-and short-run frameworks gives the following policy: • Whenever possible, run surpluses, or at least a balanced budget, to help stimulate long-term growth. • This is especially true when the economy is booming – when it is above its level of potential income.
Introduction • The argument for surpluses is weakened, and likely reversed, when the economy falls into a recession.
Introduction • At the beginning of 2000 there was a large surplus. • The economy was booming. • Unemployment was low. • There was general agreement that the economy was closing in on its potential output.
Introduction • Both short- and long-term economic frameworks would recommend cutting the national debt. • Instead of doing so, government looked at ways to spend the surplus, either by cutting taxes or by increasing spending.
Defining Surpluses and Deficits • A surplus is an excess of revenues over payments. • A deficit is a shortfall of revenues under payments. • Both are flow concepts.
Financing the Deficit • The deficit must be financed. • The government finances its deficits by selling bonds – promises to pay back the money in the future – to private individuals and to the central bank.
Financing the Deficit • Since the central bank's IOUs are money, the loans can also be made by printing money. • Potentially, the central bank has an unlimited source of funds.
Financing the Deficit • However, printing too much money would trigger inflation which can have a negative effect on the economy.
Arbitrariness in Defining Surpluses and Deficits • Defining surpluses and deficits can be arbitrary.
Arbitrariness in Defining Surpluses and Deficits • Whether or not a nation has a deficit depends on what is included as a revenue and what is included as an expenditure. • This accounting issue is central to the debate about whether we should be concerned about a deficit.
Arbitrariness in Defining Surpluses and Deficits • The Retirement Income system is based on promises to pay. • Retirement Income System - social insurance programs that provide financial benefits to the elderly and disabled and to their eligible dependents and/or survivors.
Arbitrariness in Defining Surpluses and Deficits • The way these programs is accounted for plays an important role in whether there is a budget deficit or surplus.
Surpluses and Deficits As Summary Measures • As a summary, a surplus or deficit figure reduces a complicated set of accounting relationships down to a single figure.
Surpluses and Deficits As Summary Measures • Deficit need not matter - what is important is the health of the economy.
Nominal and Real Surpluses and Deficits • A nominal deficit is the deficit determined by looking at the difference between expenditures and receipts. • A real deficit is the nominal deficit adjusted for inflation.
Nominal and Real Surpluses and Deficits • Inflation wipes out debt (accumulated deficits less accumulated surpluses). • The larger the debt and the larger the inflation, the more debt will be eliminated by inflation.
Nominal and Real Surpluses and Deficits • If inflation is wiping out debt, and the deficit is equal to the increases in debt from one year to the next, inflation also affects the deficit.
Nominal and Real Surpluses and Deficits • The real deficit is calculated by adjusting the nominal deficit for inflation. real deficit = nominal deficit - (inflation x total debt)
Nominal and Real Surpluses and Deficits • The lowering of the real deficit by inflation is not costless to the government. • Persistent inflation becomes built into expectations and causes higher interest rates.
Structural and Passive Surpluses and Deficits • It is important to make a distinction between structural and passive deficits. • Not all government expenditures are independent of the level of income in the economy.
Structural and Passive Surpluses and Deficits • There is a difference between a budget deficit being used as a policy instrument to affect the economy and a budget deficit that is the result of income deviating from its potential.
Structural and Passive Surpluses and Deficits • A structural deficit or surplus is the part of the budget deficit or surplus that would exist even if the economy were at its potential level of income.
Structural and Passive Surpluses and Deficits • A passive deficit or surplus is the part of the deficit or surplus that exists because the economy is operating below or above its potential level of output. • The passive deficit is also known as the cyclical deficit.
Structural and Passive Surpluses and Deficits • When an economy is operating above its potential, it has a passive surplus. • If the economy is operating below its potential, the actual deficit would be larger than the structural deficit.
Structural and Passive Surpluses and Deficits • There is a significant debate about what is an economy’s potential income level. • There is disagreement about what percentage of a deficit is structural and what part is passive.
The Definition of Debt and Assets • Debt is accumulated deficits minus accumulated surpluses. • Deficits and surpluses are flow concepts. • Debt is a stock concept.
Debt Management • The debt must be managed. • The Canadian government must refinance the bonds that are coming due by selling new bonds, as well as sell new bonds when running a deficit.
Debt Management • In the late 1990s, the federal government ran a budget surplus. • The government retired some of its previously issued bonds by buying them back and did not replace them as they come due.
The Need to Judge Debt Relative to Assets • Debt needs to be judged relative to assets. • Debt is a summary measure of a nation’s financial situation. • As a summary measure, debt has even more problems than deficit.
The Need to Judge Debt Relative to Assets • Debt by itself is only half the picture. • The other half of the picture is assets.
The Need to Judge Debt Relative to Assets • For a government, assets include: • Its skilled work force. • Natural resources. • Its factories. • Its housing stock. • Holdings of foreign assets.
The Need to Judge Debt Relative to Assets • For a government, assets include: • The buildings and land it owns. • A portion of the assets of the people in the country, since government gets a portion of all earnings of those assets in tax revenue.
The Need to Judge Debt Relative to Assets • When the government runs a deficit, it might be spending on projects that increase its assets. • If the assets are valued at more than their costs, then the deficit is making the society better off.
Arbitrariness in Defining Debt and Assets • Defining debt and assets can be arbitrary. • As was the case with income, revenues, and deficits, there is no perfect answer as to how assets and debt should be valued.
Arbitrariness in Defining Debt and Assets • Even after assets are taken into account, you still have to be careful when deciding whether or not to be concerned about debt.
Arbitrariness in Defining Debt and Assets • The total stock of gross debt can be broken down into market debt and non-market debt. • Market debt includes marketable bonds, treasury bills and other securities. • Non-market debt includes federal public sector pension liabilities and other federal liabilities.
Arbitrariness in Defining Debt and Assets • To calculate debt, we add market debt and non-market debt, and subtract the value of financial assets held by the government, such as cash, reserves, and loans.
Difference Between Individual and Government Debt • Individual and government debt are different.
Difference Between Individual and Government Debt • Government debt is different from an individual’s debt for three reasons: • Government debt is ongoing. • Government can print money to pay off its debt – individuals can’t. • Three quarters of government debt is internal debt – debt owed to other government agencies or to its citizens.
Difference Between Individual and Government Debt • Paying interest on the internal debt involves a redistribution among citizens of the country, but it does involve a net reduction in income of the average citizen.
Difference Between Individual and Government Debt • External debt is more like an individual’s debt. • External debt – government debt owed to individuals in foreign countries.
Government Deficits and Debt: The Historical Record • Most economists do not look at absolute figures of deficits and debt. • They are much more concerned with deficits and debt relative to GDP.
Government Deficits and Debt: The Historical Record • Deficits and debt relative to GDP rose significantly in the 1970s and 1980s. • In the late 1990s debt started to fall, reaching 50% of GDP in 2001.
