The Federal Budget and the National Debt

1. The Federal Budget and the National Debt • Outline: • The federal deficit (surplus) defined—again • The record of of the federal budget • The automatic stabilizers. • Why a federal deficit has an expansionary effect on real GDP and employment. • The national debt defined • The record of the national debt • Should we be concerned about a large national debt?

2. Federal Finance If G exceeds Tin a fiscal year, then we have a federaldeficit.If, however, Texceeds G, then we have a federal surplus. • Let: • G denote federal spending for goods and services in a fiscal year (Oct. 1 thru Sept. 30). • TX is federal tax receipts. • TR is federal transfer payments. • T is federal net taxes (TX - TR)

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5. Automatic Stabilizers Taxes (TX) and Transfer Payments (TR) are called “automatic stabilizers” because they react to changes in national income in a way that increases the federal deficit (or reduces the surplus) in the event of an economic contraction or reduces the deficit (increases the surplus) when the economy is expanding. The automaticstabilizers make sure that YD does notfall too muchwhen national incomeis falling

6. Remember that the federaldeficit or surplus isequal to the differencebetween G and Net Tax Receipts,where Net Taxes are equal toTX - TR • YTX, for example • YTX, and vice versa • YTR, for example • YTR, and vice versa Note that claims for unemployment compensation and other assistance surges when unemployment rises.

7. YR is the recession-level of national income G, T Full-employment T = TX - TR G Deficit Balanced budget at full-employment 0 YR National Income

8. Why a budget deficit has an expansionary effect on real GDP (income) and employment. G Remember that government expenditures are an injection and net takes are a leakage into the circular flow of economic activity. GDP (Income) T

9. If, ceteris paribus, G > T, then real GDP and employment will expand—at least in the short run. G GDP (Income) T

10. In the case of a federal deficit, the Treasury must borrow. The national debt is the accumulated borrowing of the federal government in all previous fiscal years, minus what has been repaid

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13. Is a large national debt a bad thing? • Arguments against a large national debt include: • The “burden on future generations” argument. • A large national debt means that a significant share of federal spending must be allocated for interest payments—leaving less for other priorities. • A large national debt makes the U.S. too dependent on foreign financial inflows. • Federal borrowing “crowds out” private sector borrowing units—i.e., firms and households.

14. “[W]e (the U.S.) owe $5.7 trillion in debt and if we don’t pay it off, our children and our grandchildren are going to have to.” Congressman Marion Berry, in a speech to the Jonesboro Lions Club on April 16, 2001.