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Unformatted text preview: CHAPTER 32 GOVERNMENT DEBT + DEFICITS 32.1 FACTS + DEFINTIONS THE GOVERNMENTS BUDGET CONSTRAINT: Government = Tax + Borrowing Expenditure Revenue Debt-Service Ratio = payments that represent the interest owed on a current stock of debt G + i x D = T + Borrowing (G + i x D) T = Borrowing subtract T from both sides Budget Deficit = any shortfall of current revenue below current expenditure Budget Deficit (D) = (G + i x D) T The governments annual budget deficit is the excess of expenditure over tax revenues in a given year. It also equal to the change in the stock of government debt during the year. Government Debt = the outstanding stock of financial liabilities for the government, equal to the accumulation of past budget deficits Budget Surplus = any excess of current revenue over current expenditure A budget deficit increases the stock of debt, and a budget surplus reduces it The governments budget deficit is equal to total government expenditure minus total government revenue. Since the government must borrow to finance any shortfall in its revenues, the annual deficit is equal to the annual increase in the stock of government debt. Whenever the deficit is positive, the stock of government debt is growing Primary Budget Deficit = the difference between the governments overall budget deficit + its debt service payments Primary Budget Deficit = G T o The primary budget deficit is equal to the excess of the governments program spending over total tax revenues o In recent years the federal government has had a significant primary budget surplus indicating that tax revenues have been more than sufficient to cover program spending DEFICITS + DEBT IN CANADA: Federal Government: o Large + persistent budget deficits beginning in the 1970s increased in stock of debt so that by 1996, the federal government net debt was equal to 70% of GDP. By 2006, after several years of fiscal contraction, the federal debt-to-GDP ratio was 36% Provincial Government: o When examining the size + effect of budget deficits or surpluses, it is important to consider all levels of government = federal, provincial, territorial + municipal 32.2 TWO ANALYTICAL ISSUES32....
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