what should we do with the big budget surplus?
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WHAT SHOULD WE DO WITH THE BIG BUDGET SURPLUS?. John B. Taylor Stanford University Crego Lecture Vassar April 24, 2000. A multiple-choice question (from Regis Philbin’s show):. What is the best thing to do with the budget surplus? (a) Reduce the debt (b) Increase government spending - PowerPoint PPT PresentationTRANSCRIPT
A multiple-choice question (from Regis Philbin’s show):
• What is the best thing to do with the budget surplus?– (a) Reduce the debt – (b) Increase government spending– (c) Cut taxes – (d) All of the above
The correct answer is (d), “all of the above”
• If that was your answer, then the next question is: – In what proportions?– For debt reduction, for spending increase, for tax cut
• 2-1-1? • 2-2-0?• 4-0-0?• Before you answer, let’s look at a few facts about
the surplus.
Is there really a surplus?
• Look at the handout: in the columns at the right, you see many, many, negative numbers, which are deficits. – tax revenues were less than government
spending.
• But, starting in 1998, the minus sign disappears; there is a surplus. – tax revenues are now greater than spending.
Surplus and debt
• When the government runs a deficit, it increases its debt
• When the government runs a surplus, it reduces its debt
• surplus (‘98) = debt (end ‘97) - debt (end ‘98)• 69 = 3771 - 3720 (+ 18 in new loans)
• Government borrows by issuing bonds– and retires or buys back bonds when in has a surplus
What happened?
• How could forecasters have been so wrong?
• Tax increases? – No that was in 1993,– and was small compared to the tax cuts in the
early 1980s.
Income growth for upper income taxpayers was very high.
• From 1994 to 1998 the percentage of taxpayers
with more than $200,000 in income rose rapidly from 1.1 percent to 1.6 percent.
• The percentage of all income in the United States earned by this group also increased, from 15 percent to 22 percent.
• And the share of taxes paid by this group rose from 30 percent to 40 percent.
Federal budget summary (billions of dollars)
Fiscal year 1998 versus 1995Tax revenues 1720.4 1351.8 Expenditures 1651.4 1515.7 Defense 270.4 272.1 Interest 243.4 232.2 Soc. Sec. 379.2 335.8 Medicare 192.8 159.9 Surplus 69.0 - 163.9
Debt as a share of GDP
• Debt/GDP can stay constant or even fall when there is a budget deficit
• Example– 5% growth of GDP– then ratio stays constant if
• Debt/GDP = Debt(1.05)/GDP(1.05)• thus $3.7 trillion times (.05) = $185 billion deficit
• Debt/GDP ratio falls with balanced budget
29_04
1950
High after WWII
19951955 1960 1965 1970 1975 1980 1985 1990
PERCENT
OF GDP
60
50
40
30
20
10
0
Steady declinewith small deficits,
some surpluses
Big deficitsstart
Post-WWII bottom
Late 1980splateau
Deficitsareback
80
70
Ratio declining again
2000
What is the forecast for the future?
• Look at the bottom row of the handout.
• Forecast of the budget surplus in the future—as far as the eye can see.
• Note that there are two parts to this– on-budget– off-budget
• Many assumptions go into this forecast.
Assumptions for revenues
• The strength of the economy• The extent to which people will move into higher
brackets• The CBO assumptions for both are conservative. • Most likely the economy will be stronger—Blue
Chip is at 4.1 versus 3.3 for CBO in 2000.
Assumptions for spending
• Discretionary spending depends on what Congress does, on who the next president is, etc.
• CBO has three alternatives (see charts in handout):– Inflated baseline
– Capped baseline
– Freeze baseline
• None are obviously good goals
Time for an answer
Debt Reduction
• A bipartisan consensus has developed that we should run an overall surplus no smaller than the off-budget surplus—that is the social security surplus.
• Now that is a good idea.• The important thing to notice is that even if the
budget is no greater than this there is still a tremendous amount of debt reduction.– Is it enough?
Spending
• Proposal: Increase spending by more than the capped baseline scenario, though not as rapidly as the inflated baseline – see handout.
• Would expect government to achieve some gains in productivity.
Taxes
• Look at handout again: – as a share of GDP, federal taxes are as high as
they have been since WWII. – It certainly seems feasible to reduce them, say
by about 1 percent of GDP.
• Would also be helpful for the economy– would lower marginal tax rates.
Conclusion and summary
• We have projections of surpluses over the next 10 years of about $4 trillion. – That is based on pretty sound assumptions.
• A balanced approach to these surpluses:– drawing down debt by 1/2 of that.– a spending increase for another 1/4, – tax cut that is about 1/4
• The proportions are 2-1-1, – Not 4-0-0 or 2-2-0– So there is room for a good debate
The End