AGD
▪ How much do you owe in education loans?
AGD
▪ How much do you owe in education loans?
▪ Add that to this!
▪ Dividing all USA debt by the labor force in the U.S. shows that
American workers each owe a record $100,720. That's double what
they owed during 2004.
Reducing the Budget
Deficit: Policy Issues
Marc Labonte, April 22, 2011
Presentation by Atunonyele Samu
October 9, 2013
Introduction
▪ Deficit: Spending exceeding Revenues
▪ How does the federal government generate income?
▪ How does the federal government spend its income, in other words
what are its obligations?
Introduction
▪ What is the big deal?
▪ Interest rates are low and there are investors willing to finance USA
debt, why worry?
Introduction
▪ What is the big deal?
▪ Interest rates are low and there are investors willing to finance USA
debt, why worry?
▪ Sustainability
– Size of debt growing faster than our income
– Passing on a something worse off to the next generation
History
▪ Current deficit spending dates back to 2002 and in 2009, it
topped 1 trillion dollars.
▪ Bigger in dollar amount since WWII
▪ Bigger as a share of GDP since WWII
▪ What is the difference between deficit spending and national
debt? (Measured as percentages of GDP)
Chart 1
Chart 2
Chart 3
Chart
4
How Much Deficit Reduction is Necessary?
Depends on policy goal
1. Policy goal 1
Increase the national savings rate or have a neutral effect
• Balanced structural budget or a budget surplus with modest deficit spending
in downturns.
2. Policy goal 2
Return fiscal policy to a sustainable path: We want GDP to grow faster than
government debt.
• What this means: budget deficit no larger than 3% of GDP in the next 10
years, a combination of tax increases and spending cuts of about 9% of GDP.
NOTE: Assumption were made on interest rate growth and GDP growth rate.
How Quickly should the Deficit Be Reduced?
Contractionary policy would increase unemployment or reduce its
rate of decrease, therefore reducing deficit spending in a recession is
difficult- an argument for doing this later
How Quickly should the Deficit Be Reduced?
Contractionary policy would increase unemployment or reduce its
rate of decrease, therefore reducing deficit spending in a recession is
difficult- an argument for doing this later.
Chalk board talk- difference between contractionary policy and
expansionary policy
Policy Options for Deficit Reduction
1. Freeze Discretionary Spending
▪ Discretionary spending is what the President and the Congress
decide to spend through annual appropriations bills. Examples
include money for such activities as the FBI, the Coast Guard, housing
and education, space exploration, highway construction, defense,
and foreign aid.
▪ Would require that in nominal terms it actually falls to be of any
significance and the likeliness of this is minimal
Policy Options for Deficit Reduction
2. Mandatory Spending
Grew from 5% of GDP in 1962 to 13% of GDP between 2009-2011
▪ Social Security, Medicare & Medicaid
▪ Financial Crisis programs and automatic stabilizers
-2009 Economic Stimulus Act
-TARP (Troubled Asset Relief program)
-GSE (Government Sponsored Enterprise)
▪ Entitlement programs - Baby boomers have increased number of
recipients. However savings on this issue are long term and not short term
and therefore do not reduce the deficit in the short run
Policy Options for Deficit Reduction
3. Revenues
Revenues lowest historically as a share of GDP
▪ Individual income taxes
▪ corporate income taxes
▪ Social insurance receipts
▪ Excise taxes
Expiration of Bush Tax cuts and AMT (Alternative Minimum Tax) patch
would increase revenues significantly OR due an improvement of the
economy given status quo, revenues should increase (real Bracket
creep)
Policy Options for Deficit Reduction
3. Revenues
How to do it
a) Redesigning the structure of the tax system
b) Adding new revenue resources, such as carbon tax or a value added
tax (VAT)
c) Increasing existing taxes
d) Broadening the tax base – by eliminating tax expenditures
(Deductions, exemptions, and credits)
e) Allowing tax cuts to expire as scheduled
What Caused the Budget Deficit?
FY2000 – $236 billion Surplus. CBO projected a $796 billion surplus for
FY2010
▪ Enactment of legislation (Biggest contributor)
▪ Economic conditions
▪ Technical changes
What Caused the Budget Deficit?
A. Legislative Changes
Enacted laws affecting revenue, mandatory spending or discretionary
spending: These Increased national debt and the cost of debt servicing. Alone
these changes increased federal budget deficits by 6.9 trillion
▪ Bush Tax cuts and various extensions of its provision- 213 billion
▪ 2009 Economic Stimulus Act-220 billion and 180 billion in spending cuts
▪ Discretionary spending- 300 billion for defense, 132 billion for non defense
What Caused the Budget Deficit?
A. Legislative Changes
▪ Legislation between 2001 and 2008 caused 2009 deficit to grow by 903 billion
▪ If no legislation was enacted in after 2008, we would still have a deficit of 900
billion in 2009
▪ Mandatory spending not responsible for deficit spending, legislation is to blame
▪ Legislation enacted in FY2009 caused the 2009 deficit to grow by 509 billion
Emergency Economic stabilization act
2009 Economic Stimulus Act
What Caused the Budget Deficit?
B. Economic Variables
Unemployment, inflation and interest rates have been different from
original projections by CBO in 2001 affecting federal receipts
▪ Recession in 2009 is a factor but not a big one, CBO projections for
2010 GDP level and actual were very close
▪ Exceeded 100 billion in 2002, 2003, 2009, and 2010
What Caused the Budget Deficit?
C. Technical changes
▪ When actual outcomes are different from technical assumptions
underlying CBO projections
▪ Ex: More beneficiaries take up benefits or more tax payers claim a
credit
▪ 434 billion of shift to deficit in 2010 (40 billion to Fannie Mae and
Freddie Mac)
Conclusion
▪ Reduction of deficit will not happen through a reduction in
discretionary spending (including defense and non-defense
spending). Only reduce the deficit by 1% of GDP by 2018
▪ Long term projection of budget deficits are a result of growth in
elderly entitlement spending but restricting growth of entitlement
programs alone will not deal with the deficit problem. Gradual
changes to entitlement programs result in modest deficit reduction
in the short run because it exempts current retirees and elderly
people
Conclusion
▪ Even in the absence of other changes, legislative changes were the
most contributing factor to the deficits. However legislation to
reduce the deficit has been offset by other legislation to motivate the
economy that increase the deficit.
▪ Example: In 111th Congress, the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 increased the deficit
by an estimated 374 billion in 2011 (204 billion attributable to
extension of expiring tax provisions)
▪ In 112th Congress, the Department of Defense and Full Year
Continuing Appropriations Act of 2011 reduces discretionary
spending 2011 by 10 billion
My synopsis
What about using our wealth to pay our
debt : Oil, Gold and other natural
resources
On a global perspective, how bad is the
USA?
Deficits are not party specific
Do not ask me difficult questions
Despite how bad things are in
the USA in terms of debt and
the future economic
prospects, many people would
prefer to live in the USA than
in their home countries, me
included  USA!