Chapter 32

Chapter 32 - Chapter 32 The governments budget constraint...

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Chapter 32 The government’s budget constraint Government expenditure must be financed by either tax revenue or by borrowing: o Government expenditure = Tax Revenue + Borrowing Government expenditures are composed of: o Purchases of goods and services G o Debt-service payments = interest that they have to pay each year on the outstanding national debt (ixD) o Transfer payments (this doesn’t make a difference to the economy) Since T is the government’s tax revenues net of transfers, the budget constraint becomes : G+(ixD) = T + Borrowing The government’s annual budget deficit is: o The government’s borrowing, which is o The CHANGE in the stock of debt The bidget deficit can therefore be written: o ΔD = (G+i x d) – T o Budget deficit debt rises o Budget surplus debt falls The primary budget deficit: o The deficit on the non-interest part of the budget o Primary budget deficit = total budget deficit – debt service payments Deficits and Debt in Canada The budget has been balanced or in surplus for the last 10 years – using the surplus to pay down the national debt It is important to the debt to GDP ratio in order to see if the country is capable of paying off the debt. The stance fiscal policy
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Fiscal policy is the use of the government’s tax and spending policies in an effort to influence the level of GDP For a given set of tax and spending policies, the budget deficit is negatively related to real GDP Higher GDP giver greater tax revenues which reduce the deficit the budget deficit function shows the negative relationship between the deficit and Y. Changes in real GDP lead to movements along a given budget deficit function Since changes in Y will change the budget deficit, we can’t inger anything about policy from changes in the deficit. o May be a change in policy o Or may be no change in policy – simply a change in economic activity over the business cycle Changes in the stance of fiscal policy are shown by changes in the cylically adjusted deficit The cyclically adjusted deficit (CAD) is the budget deficit that would exist with the current policies if Y were equal to Y*. If Y<Y*, the budget deficit will be larger than the CAD
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Chapter 32 - Chapter 32 The governments budget constraint...

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