mcgraw-hill/irwin copyright © 2008 by the mcgraw-hill companies, inc. all rights reserved. chapter...
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McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER 20
DEFICIT DEFICIT FINANCEFINANCE
20-2
How Big is the Deficit?
Deficit Surplus On-budget deficit Off-budget deficit
20-3
How Big is the Deficit?
Figure 20.1: Federal government deficits and surpluses (1965-2005)
-500
-400
-300
-200
-100
0
100
200
300
400
500
1965 1970 1975 1980 1985 1990 1995 2000 2005
Fed
eral
bud
get d
efic
its
in b
illi
ons
of d
olla
rs
-7
-5
-3
-1
1
3
5
7
Fed
eral
bud
get d
efic
its
as p
erce
ntag
e of
GD
P
$ billions Percent of GDP
20-4
How Big is the Debt?
National (Public) Debt Stocks v Flows
20-5
How Big is the Debt?Figure 20.2: Federal government debt held by the public (1965-2005)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1965 1970 1975 1980 1985 1990 1995 2000 2005
Deb
t hel
d by
the
publ
ic in
bil
lion
s of
dol
lars
0
10
20
30
40
50
60
Deb
t hel
d by
the
publ
ic a
s pe
rcen
tage
of G
DP
$ billions Percent of GDP
20-6
Interpreting Deficit, Surplus, and Debt Numbers
Government Debt held by the Federal Reserve Bank State and Local Government Effects of Inflation
inflation tax
Capital versus Current Accounting Tangible Assets Implicit Obligations Summing Up
20-7
The Burden of the Debt
Statutory versus Economic Incidence Lerner’s View
Internal Debt External Debt
20-8
Overlapping Generations ModelThe Period 2007-2027
Young Middle-Aged Old
(1) Income $12,000 $12,000 12,000
(2) Government Borrowing -6,000 -6,000
(3) Government- provided consumption 4,000 4,000 4,000
The Year 2027
Young Middle-Aged Old
(4) Government raises taxes to pay back debt
-4,000 -4,000 -4,000
(5) Government pays back debt +6,000 +6,000
20-9
Generational Accounting
Computation of Net Tax PV of transfers received – PV of taxes paid
20-10
Neoclassical Model
Crowding Out Hypothesis Empirical testing of the hypothesis
20-11
The Ricardian Model
Intergenerational transfers Form of Finance is irrelevant Empirical evidence
20-12
To Tax or to Borrow
Benefits-Received Principle Intergenerational Equity Efficiency Considerations
χ = ½εLt2
Macroeconomic Considerations Functional finance
Moral and Political Considerations
20-13
Present Value of Tax Payments Under Alternative Taxing/Borrowing Decisions
Policy Year 1
Year 2
All Future Years
PV @ 10% interest rate
Spend an additional $100 in year 1 100 0 0 100
Financing Options
Balanced budget: raise 100 in taxes in year 1
100 0 0 100
Deficit Finance I: borrow 100 in year 1 and pay back debt plus interest in year 2
by raising taxes
0 110 0 100
Deficit Finance II: borrow 100 in year 1 and pay interest on debt in all subsequent years always rolling over debt principle
0 10 10 100
20-14
To Tax or To Borrow
Tax rate
ExcessBurden
t 2t
χ2
χ1