Ch13Sp08

Ch13Sp08 - CHAPTER 13 FEDERAL DEFICITS AND THE NATIONAL...

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Unformatted text preview: CHAPTER 13 FEDERAL DEFICITS AND THE NATIONAL DEBT Spring Semester, 2008 1 DEFICITS VS. DEBT A budget deficit: Excess of government outlays over tax collections in a given year Deficits have to be financed by borrowing Annual borrowing increases the size of the national debt Measured on an annual basis The national debt: Is the total amount of bonds issued by the U.S. Treasury that have not been paid back 2 U.S. TREASURY FINANCES BUDGET DEFICITS "Refunding" of existing national debt: Sells new bonds to pay off old bonds as they become due Sells new bonds to finance current-year expenditures not financed by taxes History of budget deficits and surpluses: Since 1969, no surpluses until 1999 Beginning in 1969, deficits expanded rapidly. Deficits expanded rapidly again in 1980s 3 THE NATIONAL DEBT Year National Debt (Billions) $.075 $.000 $.063 $2.7 $1.3 1791 1835 1850 1865 1900 Real GDP (1983 base year) 1930 1945 $16.2 $259 $ 97.0 $1,430 ------------------------------------------------------------- ------------------------------------------------------------- 1960 $287 $ 970. 1970 $371 $ 956. -------------------------------------------------------------- 1980 1985 1990 $914 $1,109 ---------------------------------------------- $1,827 $1,698 $3,163 $2,420 $5,629 $5,664 $6,783 $7,379 $7,933 $8,500 $9,017 ------------------------------------------------------------- ------------------------------------------------------------- 1995 $4,921 $3,229 2000 2002 2003 2004 2005 2006 2007 (9/14) $3,269 $4,062 $4,473 4 MEASURES TO BALANCE THE FEDERAL BUDGET Gramm-Rudman-Hollings approach: Mid-1980s Automatic expenditure cuts if budget not balanced Equal % reduction in all items Debt interest excluded Social Security excluded Recession waiver 1986-1993 time line for debt. Year Target Actual 1986 $176 $221 1988 $144 $155 1990 $100 $221 1993 $000 $255 5 BALANCING THE BUDGET (continued) Gramm-Rudman-Hollings (continued) Supreme Court declared unconstitutional in 1986 Congress amended act in 1987 Replaced by Budget Enforcement Act of 1990: Taxes increased to reduce deficit President Bush broke promise not to raise taxes. Probably cost him the election of 1992. 6 BALANCING THE BUDGET (continued) The Debt-Ceiling limit approach: Congress sets limit to size of debt. This limits the size of deficits Debt ceiling raised each year (Note: including March, 2006 raised to $9 trillion). Fiscal crisis when Congress refuses to raise debt ceiling (House Republicans "Contract with America" in 1996 nearly shut down the Federal Government) 7 BALANCING THE BUDGET The line item veto approach Before 1997, president had to approve or veto entire bill Selective vetoes permitted under the new legislation Too early to tell if President could have used the line item veto in ways that would reduce the deficit Has been declared unconstitutional by the Supreme Court Recently re-introduced by President Bush 8 THE EFFECTS OF THE NATIONAL DEBT A. How large is the debt? A. Is there a "payoff" burden? A. Is there an "interest cost" burden? A. Is there a "crowding out" burden? A. Can the federal government go bankrupt? 9 HOW LARGE IS THE DEBT? A. Adjustments for inflation B. Adjustments for size of GDP C. Adjustments for capital expenditures that create real assets D. Adjustments for internal vs. external ownership 10 THE NATIONAL DEBT Year National Debt (Billions) $.075 $.000 $.063 $2.7 $1.3 1791 1835 1850 1865 1900 Real GDP (1983 base year) 1930 1945 $16.2 $259 $ 97.0 $1,430 ------------------------------------------------------------- ------------------------------------------------------------- 1960 $287 $ 970. 1970 $371 $ 956. -------------------------------------------------------------- 1980 1985 1990 $914 $1,109 ---------------------------------------------- $1,827 $1,698 $3,163 $2,420 $5,629 $5,664 $6,783 $7,379 $7,933 $8,500 $9,017 ------------------------------------------------------------- ------------------------------------------------------------- 1995 $4,921 $3,229 2000 2002 2003 2004 2005 2006 2007 (9/14) $3,269 $4,062 $4,473 11 EXHIBIT 4: National Debt as a Percentage of GDP: 1930 2003, P. 325 Source: Economic Report of the President, 2004, http://www.access.gpo/eop/index.html, Tables B-78, and B-79. 12 WHO OWNS THE DEBT? Federal Reserve, Federal agencies, & State & Local Governments Business firms & Individuals Foreigners TOTAL INTERNAL DEBT: 78% EXTERNAL DEBT: 22% 13 52% 26% 22% -----100% EXHIBIT 6 Federal Interest as a Percentage of GDP: 1940-2005. P. 329 Source: Economic Report of the President, 2004, http://www.access.gpo/eop/index.html, Tables B-1 and B-80. 14 CROWDING OUT Interest Rates Bus HH S1 Bus. + Gov't D1 D2 Dollars 15 EXHIBIT 8 Zero, Partial and Complete "Crowding Out" P. 332 16 THE "BANKRUPTCY ISSUE Can an increasing national debt force the U.S. government into bankruptcy? 1. 1. 1. 1. The power to tax The ability to "refund" the debt The ability to print money The authority to repudiate the debt. 17 END OF LECTURE ON THE NATIONAL DEBT. QUESTIONS??????? 18 ...
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This note was uploaded on 04/03/2008 for the course ACC 231 taught by Professor Levin during the Spring '08 term at ASU.

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