Eco 301 ch26

Fiscal Policy: A Summing Up ,[object Object],[object Object],[object Object],[object Object]

The Government Budget Constraint ,[object Object],[object Object],26-1 is the interest payments on government debt at the end of year t -1. In words: The budget deficit equals spending including interest payments on the debt, minus taxes net of transfers. is government spending during year t . is taxes minus transfers during year t .

Fiscal Policy: A Summing Up ,[object Object],[object Object],[object Object]

The Government Budget Constraint ,[object Object],[object Object],change in the debt interest payments Primary deficit

Current Versus Future Taxes ,[object Object],[object Object],[object Object],[object Object],[object Object]

Current Versus Future Taxes ,[object Object],Replacing B 2 =0bn and B 1 =1bn , and rearranging: In words, to repay the debt fully in year 2, the government must run a primary surplus equal to (1+ r )bn.

Full Repayment in Year 2 ,[object Object],(a) If debt is fully repaid during year 2, the decrease in taxes of 1 in year 1 requires an increase in taxes equal to (1+ r ) in year 2.

Full Repayment in Year 2 ,[object Object],[object Object],[object Object],[object Object]

Full Repayment in Year t ,[object Object],[object Object],[object Object],which implies that the necessary surplus in year t to repay the debt must be:

Full Repayment in Year 5 ,[object Object],(b) If debt is fully repaid during year 5, the decrease in taxes of 1 in year 1 requires an increase in taxes equal to (1+ r ) 4 during year 4. Notice taxes go back to “normal” level of zero in year 2, and then rise in year t to pay the debt.

Debt Stabilization in Year 2 ,[object Object],(c) The government doesn’t want to repay the debt. It just wants to keep it constant. If debt is stabilized from year 2 on, then taxes must be permanently higher by r from year 2 on.

Conclusions ,[object Object],[object Object],[object Object]

Conclusions ,[object Object],[object Object],[object Object],[object Object],[object Object]

The Arithmetic of the Debt to GDP Ratio ,[object Object],Divide 26.3 by Y t Notice that Then

The Arithmetic of the Debt to GDP Ratio ,[object Object],It turns out that So we can simplify And reorganize

The Evolution of the Debt to GDP Ratio ,[object Object],[object Object]

The Evolution of the Debt-to-GDP Ratio in OECD Countries ,[object Object],[object Object],[object Object],[object Object],[object Object]

The Evolution of the Debt-to-GDP Ratio in OECD Countries ,[object Object],[object Object]

Four Issues in Fiscal Policy ,[object Object],[object Object],26-2 1

Deficits, Output Stabilization, and the Cyclically Adjusted Deficit ,[object Object],[object Object],[object Object],[object Object],2

Deficits, Output Stabilization, and the Cyclically Adjusted Deficit ,[object Object],[object Object],[object Object],[object Object]

Wars and Deficits ,[object Object],[object Object],[object Object],3

Reducing Tax Distortions ,[object Object],[object Object],[object Object]

The Dangers of Very High Debt ,[object Object],[object Object],4

The Dangers of Very High Debt ,[object Object],[object Object],[object Object],[object Object],[object Object]

The U.S. Budget ,[object Object],[object Object],[object Object],26-3

20.1 Revenues 0.7 Inflation components 1.7 Real interest payments (3) 2.4 Net interest payments (2) 3.9 Primary surplus (1) (+ sign: surplus) 8.1 Transfers (note: here, part of G; in the book, a part of T) 1.7 Nondefense 0.5 Other spending 2.6 Grants to state/local governments 2.2 Inflation adjusted surplus: (1) minus (3) 1.5 Official surplus: (1) minus (2) 31.0 Memo item. Debt to GDP ratio 3.3 Defense 7.0 Social insurance contributions 16.2 Expenditures, excluding interest payments 5.0 Consumption expenditures 1.0 2.0 10.0 Table 25-2 U.S. Federal Budget Revenues and Expenditures, Fiscal Year 2001 (Percent of GDP) Source: Survey of Current Business, December 2001. Tables 3-2 and 3-7. Indirect taxes Corporate profit taxes Personal taxes

The U.S. Budget ,[object Object],[object Object]

The U.S. Budget ,[object Object],[object Object],[object Object],[object Object]

Surpluses and the Aging of America ,[object Object],17.0 16.0 10.0 7.0 Total 2060 3.0 7.0 7.0 Source: “The Economic and Budget Outlook, Fiscal Years 1998-2060.” Congressional Budget Office, January 1999. Table 2-5. 2.0 3.0 5.0 2010 Medicaid Medicare Social Security Projected Spending on Social Security, Medicare, and Medicaid, 1998-2060 (Percent of GDP) Table 26-3 3.0 1.0 6.0 2.0 7.0 4.0 2040 1998

Surpluses and the Aging of America ,[object Object],[object Object],[object Object],[object Object]

Surpluses and the Aging of America ,[object Object]

Eco 301 ch26

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Eco 301 ch26