DEFICITS AND DEBT

DEFINITIONS

DEFICIT – ANNUAL AMOUNT THAT GOVERNMENT BORROWS (SIMILAR TO WHAT PUT ON CREDIT CARD IN A YEAR)

DEBT – TOTAL AMOUNT OF BORROWING OVER ALL YEARS THAT’S NOT BEEN REPAID (SIMILAR TO CREDIT CARD BALANCE)

MEASUREMENT

BEST MEASURED AS A % OF GDP

HERE – ANNUAL DEFICIT AS A % OF GDP

HIGHEST DURING WAR PERIODS

TRENDS IN RELATIVE SIZE OF DEBT

REDUCED RELATIVE SIZE OF DEBT AFTER WORLD WAR II

HOWEVER, SINCE MID 1980S, RELATIVE SIZE HAS INCREASED

TRENDS IN FEDERAL BORROWING

IS GOVERNMENT BORROWING BAD? BORROWING IS A WAY TO MATCH USERS WITH PAYMENT

APPLIES TO LONG-LASTING GOVERNMENT PROJECTS * ROADS, BRIDGES, PUBLIC BUILDINGS * MILITARY HARDWARE

TAXPAYERS WHO USE THE PROJECT PAY FOR IT

BUT LESS DEFENSIBLE IF USED TO FINANCE CURRENT CONSUMPTION

COSTS OF TOO MUCH BORROWING

SAME AS FOR AN INDIVIDUAL HOUSEHOLD OR BUSINESS

AS DEBT RISES, MORE MUST BE SPENT ON INTEREST ON THE DEBT

MEANS LESS MONEY AVAILABLE TO BE SPENT ON OTHER THINGS (OPPORTUNITY COST)

IS THERE A POINT AT WHICH THE DEBT BECOMES TOO COSTLY?

SOURCE OF INTENSE RESEARCH BY ECONOMISTS

ANSWER: WHEN DEBT TO GDP RATIO ENTERS THE 85% TO 100% RANGE - THEN REDUCES ECONOMIC GROWTH RATE OF THE COUNTRY

CALLED “TIPPING POINT”

OPERATING VS. CAPITAL BUDGET

WOULD PREFER TO DIVIDE THE FEDERAL BUDGET INTO TWO PARTS

OPERATING – FOR DAY TO DAY EXPENDITURE; MUST BE BALANCED

CAPITAL- FOR LONG-LASTING PROJECTS; BORROWING CAN BE USED

BUSINESSES AND STATE/LOCAL GOVERNMENTS USE

OTHER RECOMMENDATIONS TO CONTROL GOVERNMENT BORROWING

REQUIRED BALANCED BUDGET

RESTRICTIONS ON GROWTH OF SPENDING (POPULATION GROWTH + SOME REAL GROWTH)

RESTRICT SPENDING AND TAXES TO A CERTAIN % OF GDP

POTENTIAL FIXESSPENDING: SLOW GROWTH OF BIG ENTITLEMENT PROGRAMS (“MEANS TEST”)

TAXES: REDUCE DEDUCTIONS/CREDITS MAKE INCOME TAX MORE PROGRESSIV