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?
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)
If G exceeds T in a fiscal year,
then we have a federal deficit.
If, however, T exceeds G,
then we have
a federal surplus.
Federal Outlays and Receipts, 1993-99
1800
1700
1600
1500
1400
1300
1200
1100
1000
Receipts
Outlays
93
94
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95
96
billions
97
98
99
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 automatic
stabilizers make sure
that YD does not
fall too much
when national income
is falling
Remember that the federal
deficit or surplus is
equal to the difference
between G and Net Tax Receipts,
where Net Taxes are equal to
TX - 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.
YR is the recession-level of
national income
G, T
Fullemployment
T = TX - TR
G
Deficit
Balanced budget at
full-employment
0
YR
National Income
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
If, ceteris paribus, G > T, then real GDP and
employment will expand—at least in the short run.
G
GDP (Income)
T
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
The National debt, Selected years
6
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5
4
3
2
1
0
1865
1919
1946
1965
1980
Trillions
1985
1993
1997
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.
“[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.
Interest as a Percent of Federal O utlays
16
14
12
10
8
6
4
1965
1970
1975
1980
1985
Yea r
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1990
1995
2000
Who Owns the National Debt?
Agencies and Trusts
1814 / 26%
Privately Owned
3342 / 48%
Foreign Inves tors
1271 / 18%
Fed. Reserve Banks
463 / 7%
Source: Federal Reserve