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The Government Budget: Prospects and Implications

The Government Budget: Prospects and Implications

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The Government Budget: Prospects and Implications

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  1. The Government Budget:Prospects and Implications Andrew B. Abel March 8, 1999

  2. National Saving and Wealth • Income Statement Concepts • Output: Y = C + I + G + NX • National Saving: S = Y - C - G = I + NX • Balance Sheet Concept • National Wealth = domestic capital stock + net foreign assets The Government Budget: Prospects and Implications, Professor Andrew Abel

  3. Link Between Balance Sheet and Income Statement • National Saving = Growth of National Wealth • S = I + NX • I = growth of domestic capital stock • NX = growth of net foreign assets The Government Budget: Prospects and Implications, Professor Andrew Abel

  4. Capital Gains and Saving • Capital gain for an individual • Increases current income • If not spent: • Increases current saving • Increases wealth at end of year • Capital gain can increase current and/or future consumption of individual The Government Budget: Prospects and Implications, Professor Andrew Abel

  5. Capital Gain in Closed Economy:National Perspective • S = I • If add capital gain to national output, Y • S would increase • Would have to add capital gain to I • But I is intended to measure gross capital formation, which affects capacity to produce and consume in future The Government Budget: Prospects and Implications, Professor Andrew Abel

  6. Source of Capital Gains • Increase in dividend, current or future • Reflects increase in current or future output • Decrease in r • Does not reflect increased current or future output • Bubble • Unrelated to current or future output The Government Budget: Prospects and Implications, Professor Andrew Abel

  7. Capital Gains:Individual vs. National • Increase ability of individual to consume • May not affect ability of nation to consume • Example: Stock market bubble • Increases wealth of individual owners • Does not increase ability of nation as a whole to consume The Government Budget: Prospects and Implications, Professor Andrew Abel

  8. U.S. National Saving, 1998-III The Government Budget: Prospects and Implications, Professor Andrew Abel

  9. Gross Government Saving1998-III The Government Budget: Prospects and Implications, Professor Andrew Abel

  10. Budget Outlook under Current Policies Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-1, p. The Government Budget: Prospects and Implications, Professor Andrew Abel

  11. Deficits and Debt in Europe(percent of GDP) The Government Budget: Prospects and Implications, Professor Andrew Abel

  12. Revenues as a Share of GDP(fiscal year) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-2, p. 45. The Government Budget: Prospects and Implications, Professor Andrew Abel

  13. Revenues by Source(fiscal year) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-3, p. 47 The Government Budget: Prospects and Implications, Professor Andrew Abel

  14. Outlays • Discretionary spending • Annual appropriation • Defense, education, transportation, ... • Mandatory spending (Entitlements) • Eligibility rules and benefit formulas • Offsetting receipts • e.g., drilling leases for Outer Continental Shelf • Net interest The Government Budget: Prospects and Implications, Professor Andrew Abel

  15. OutlaysDiscretionary Spending Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63. The Government Budget: Prospects and Implications, Professor Andrew Abel

  16. OutlaysEntitlements and Other Mandatory Spending Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63. The Government Budget: Prospects and Implications, Professor Andrew Abel

  17. OutlaysNet Interest Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63. The Government Budget: Prospects and Implications, Professor Andrew Abel

  18. CBO Budget Projections Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii. The Government Budget: Prospects and Implications, Professor Andrew Abel

  19. CBO Budget Projections Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii. The Government Budget: Prospects and Implications, Professor Andrew Abel

  20. Measures of Fiscal Policy Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16. The Government Budget: Prospects and Implications, Professor Andrew Abel

  21. Measures of Fiscal Policy Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16. The Government Budget: Prospects and Implications, Professor Andrew Abel

  22. Projections of Federal Debt Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-3, p. 38. The Government Budget: Prospects and Implications, Professor Andrew Abel

  23. Trust Fund Surpluses(fiscal year, billions of dollars) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-4, p. 41. The Government Budget: Prospects and Implications, Professor Andrew Abel

  24. Burden of the Debt • Debt ceiling • raised to $5500 billion in March 1996 • raised to $5950 billion in Balanced Budget Act of 1997 The Government Budget: Prospects and Implications, Professor Andrew Abel

  25. Two Views of Burden of Debt • “We Owe it to Ourselves” ==> No Burden • $1759 billion held by gov’t is no burden • $3720 billion held by public is owed to public • but foreigners own some of this debt • Burden, even if U.S. citizens owned all of debt • Crowds out capital stock • Reduces long-run wages and output per person The Government Budget: Prospects and Implications, Professor Andrew Abel

  26. Federal Interest Outlays(Fiscal year, billions) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 4-8, p. 79. The Government Budget: Prospects and Implications, Professor Andrew Abel

  27. Debt-GDP Ratio in the U.S. The Government Budget: Prospects and Implications, Professor Andrew Abel

  28. Changes in Debt-GDP Ratio • Debt-GDP Ratio: • Growth of numerator: deficit • Primary deficit + net interest • Growth of denominator: nominal GDP growth The Government Budget: Prospects and Implications, Professor Andrew Abel

  29. Factors Causing Debt-GDP Ratio to Rise • Large Primary Deficits (deficit minus interest) • Wars • Great Depression • 1980s and first half of 1990s • High (Real) Interest Rates • Low GDP growth • Great Depression The Government Budget: Prospects and Implications, Professor Andrew Abel

  30. Effect on Deficit of 1 Percentage Point Reduction in Measured CPI(fiscal years, billions of dollars) Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1998-2007, January 1997, p. 41. The Government Budget: Prospects and Implications, Professor Andrew Abel

  31. Long-Run Deficit Projections(Calendar year, percentage of GDP) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-5, p. 43. The Government Budget: Prospects and Implications, Professor Andrew Abel

  32. Long-Run Debt Projections(Debt held by public, calendar year, percentage of GDP) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 2-2, p. 44. The Government Budget: Prospects and Implications, Professor Andrew Abel

  33. Will Federal Debt Be Eliminated? • Debt held by public • Projected to be zero in 2012 • Why might this projection prove incorrect? • Projected surpluses might not occur • Policies to cut taxes/increase spending • Recessions • Social Security Trust Fund may sell bonds to public in exchange for equity The Government Budget: Prospects and Implications, Professor Andrew Abel

  34. Social Security:Demographic Time Bomb Source: 1998 OASDI Trustees Report, Table II.F.19 The Government Budget: Prospects and Implications, Professor Andrew Abel

  35. OASDI Trust Fund Ratio Source: 1998 OASDI Trustees Report, Table II.F.20 The Government Budget: Prospects and Implications, Professor Andrew Abel

  36. Possible Solutions • Increase Contributions by Workers • Increase retirement age • Reduce Benefits Paid to Retirees • Increase retirement age • Tax Social Security benefits • Earn Higher Return on Assets in Trust Fund • Invest in equities • Privatize Social Security • Individuals control allocation of assets • Transitional problems The Government Budget: Prospects and Implications, Professor Andrew Abel

  37. Clinton Plan: Use of Projected Surpluses, 15 Years The Government Budget: Prospects and Implications, Professor Andrew Abel

  38. Surpluses, Deficits, and Debts* • SS Surp. + On-Budget Surp. = Unified Surp. • SS Def. + On-Budget Def. = Unified Def. • DSSTF = SS Surp. = - SS Def. • DGross Debt = On-Budget Def. = - On-Budget Surp. • DDebt Held by Public = Unified Def. = - Unified Surp. • -DSSTF + DGross Debt = DDebt Held by Public • DGross Debt = DDebt Held by Public + DSSTF *Ignores other off-budget items and trust funds The Government Budget: Prospects and Implications, Professor Andrew Abel

  39. Double Counting? • Unified surplus results from SS surplus • SS surplus increases SSTF anyway • Transfer 62% of projected unified surplus to Social Security • DSSTF = SS Surplus + Transfer • DGross Debt = Unified Deficit + Transfer • Unified deficit and debt held by public unchanged The Government Budget: Prospects and Implications, Professor Andrew Abel

  40. Illustration of Transferto Social Security The Government Budget: Prospects and Implications, Professor Andrew Abel