public debt - Public Debt FYI: let bold print denote...

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Public Debt FYI: let bold print denote definitions that are very important. Let italics denote definitions and terms that are somewhat important. 1. What is government debt? a. Deficit==revenue - expenditure b. Debt==last year’s debt + deficit c. Balanced budget is where deficit=0, or, equivalently, where revenue=expenditure. d. Direct government debt is held by municipal, provincial and federal governments. i. Federal government owes about 481 billion in direct debt in 2007. (32 million people C about $15k per person) ii. BC government total tax-supported debt is about 28 billion. (4 million people C about $7k/person) e. Direct debt is debt owed by the agency to creditors. Government of Canada issues bonds, which people buy. Government of Canada is the agency, bond buyers are the creditors. f. Indirect debt is also held i. Crown corporations (ICBC, BC Hydro, Canada Post) can hold debt. (1) BC Hydro owes approx 8 billion ii. Crown corporations are ultimately owned by the people, and their debts must be paid by the people. g. The total of all debt that must ultimately be paid by the people if the agencies in question fail or go bankrupt is referred to as ‘ tax-supported debt’ . 2. Why do people borrow? a. Borrowing and saving can help you smooth consumption over variation in income. i. self-employed people can easily have very good months and very bad months (eg, commercial real estate agents). So, when times are good they sock money in the bank; when times are bad, the take it out of the bank. ii. dissaving (taking money out of the bank) and borrowing are essentially identical. (1) dissaving requires saving in advance. b. Borrowing can help you finance investment . university is an investment. You pay now (in the form of money, time, effort, suffering); you get something later (money, fun, morose over- educated smirk, good job). i. An investment is something that you pay for before you get all the benefits. The costs are front-loaded. 3. In what ways is government borrowing different from that of regular folks. a. Governments try to smooth consumption, too. i. Over the business cycle, for example. When there is a recession, we don’t expect governments to raise tax rates to make ends meet; we expect them to use savings or to borrow money. b. It may be less constrained. If you lose your job, nobody wants to lend you money ("you can only borrow if you can prove that you don’t need it"). c. It may get better interest rates. Governments borrow through issuing bonds. Canada Savings Bonds are government debt. d. It may be able to borrow for the very long term. Governments engage in all sorts of intergenerational transfers C pension promises now won’t materialise into cheques for 40 years. Try getting an unsecured 40 year loan from your neighbourhood credit union!
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public debt - Public Debt FYI: let bold print denote...

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