The deficit during a time period is the excess of spending over revenues
The surplus during a time period is the excess of revenues over spending
Some items are off-budget, like the revenues and expenditures associated with Social Security.
The Federal Debt
The debt at a given time is the sum of all past budget deficits.
Cumulative excess of past spending over past receipts.
When there is a deficit, debt goes up; when there is a surplus, debt goes down.
Debt is stock variable, while deficit and surplus are flow variables
How Big is the Debt?
The net federal debt at end of 2007 was:
That is, 4 trillion dollars.
State and local governments owe another 1.5 trillion dollars.
Who owns the government debt?
As of August 2007, the biggest chunk is held by foreign governments. Japan tops the list (with $644 billion), followed by China ($350 billion), United Kingdom ($239 billion) and oil exporting countries ($100 billion).
Other big holders of Treasury debt include state and local governments ($467 billion); individual investors, including brokers ($423 billion); public and private pension funds (319 billion); mutual funds ($243 billion); holders of US savings bonds ($206 billion); insurance companies ($166 billion) and banks and credit unions ($117 billion.)
Inflation and Debt
When prices change, so does the real value of the debt.
In 2007, the debt was $4 trillion, and inflation was approximately 2.5%. Thus inflation reduced the real value of the federal debt by $100 billion.
Why do foreign countries hold so much U.S. debt?
Capital versus Current Accounting
Current spending refers to expenditures that are consumed during the year
Capital spending refers to expenditures for durable items such as dams, radar stations, and airports.
Estimates suggest that stock of capital is valued at approximately $2.1 trillion stock.
The federal government does not distinguish between current and capital spending.
Standard accounting procedure for many businesses and state/local governments is to keep separate budgets.
In absence of capital budgeting , some unusual government decisions, like selling government assets to the private sector and claiming deficit is falling.
Future Social Security and Medicare promises that must be paid out of future tax revenue
Social Security’s unfunded future liability is $9 trillion, and Medicare’s is $6 trillion
Some of these are likely be reduced by legislative action in future.
The Burden of Debt
Why should we care about whether the national debt is increasing or decreasing?
Future generations have to retire the debt or refinance it.
Debt finance allows the government to shift the tax burden to future generations.
The Burden of Debt:
3 equal sized generations.
Young, middle-aged, and old.
Each person has fixed income of $12,000.
Each time period lasts 20 years.
Government borrows $12,000 in 2004 to finance consumption of current generations.
Government levies taxes in 2004 to pay back the debt in 2024.
The Burden of Debt
Elderly in 2004 had lifetime consumption that was $4,000 higher than it otherwise would have.
Middle-aged and young in 2004 are no better off (or worse off).
Young in 2024 has a lifetime consumption that was $4,000 lower than it otherwise would have.
Debt finance shifts the burden to future generations.
How much does each generation benefit of tax payers benefit, on net, from the government tax and spending policies, assuming that the budget is in long-term balance?
Compute government’s intertemporal budget constraint and figure out tax pattern required to meet budget constraint.
To Tax or Borrow?
Benefits-received principle states that the beneficiaries of a particular spending program should have to pay for it.
Intergeneration equity states that if younger generations will be richer because of technological progress, should transfer from them.