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Transcript of © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 1 Deficits, Surpluses, & the Public Debt...
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 11
Deficits, Deficits, Surpluses, Surpluses,
& the & the Public Public DebtDebt
Deficits, Deficits, Surpluses, Surpluses,
& the & the Public Public DebtDebt PUBLIC VISA
PublicPublic Mastercard Mastercard
PUBLIC VISA
PublicPublic Mastercard Mastercard
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGESLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 22
In this chapter you will learnIn this chapter you will learn
10.110.1 The definitions of budget surplus, budget The definitions of budget surplus, budget deficit, the public debt, and the diverse deficit, the public debt, and the diverse budget philosophiesbudget philosophies
10.210.2 About the recent Canadian budget About the recent Canadian budget surpluses, deficits, and public debtsurpluses, deficits, and public debt
10.310.3 The misconceptions about budget deficits The misconceptions about budget deficits and the national debtand the national debt
10.410.4 The substantive issues about budget The substantive issues about budget deficits and the public debtdeficits and the public debt
10.510.5 About recent budgetary surpluses About recent budgetary surpluses
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 33
Chapter 10 TopicsChapter 10 Topics
10.110.1 Deficits, Surpluses & Debt: Deficits, Surpluses & Debt: Definitions & PhilosophiesDefinitions & Philosophies
10.210.2 The Public Debt: Facts & Figures The Public Debt: Facts & Figures
10.310.3 False Concerns False Concerns
10.410.4 Substantive Issues Substantive Issues
10.510.5 Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 44
Deficit & Debt: DefinitionsDeficit & Debt: Definitions
Budget DeficitBudget Deficit Annual amount by which government Annual amount by which government
expenditures exceed taxesexpenditures exceed taxes E.g. 1996-97 deficit = $13.5 billionE.g. 1996-97 deficit = $13.5 billionPublic DebtPublic Debt Accumulation of all past deficits & Accumulation of all past deficits &
surplusessurpluses E.g. 2002 public debt =$640 billionE.g. 2002 public debt =$640 billion
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 55
Budget PhilosophiesBudget Philosophies
Annually Balanced BudgetAnnually Balanced Budget– G = T every yearG = T every year– Intensifies the cycle (pro-cyclical)Intensifies the cycle (pro-cyclical)– Some believe this approach constrains an Some believe this approach constrains an
undesirable expansion of the public sectorundesirable expansion of the public sector
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 66
Budget PhilosophiesBudget Philosophies
Cyclically Balanced BudgetCyclically Balanced Budget– G = T over each business cycleG = T over each business cycle– Deficits in recessionary downswingsDeficits in recessionary downswings– Surpluses in inflationary upswingsSurpluses in inflationary upswings– Counter-cyclical (stabilizes the cycle)Counter-cyclical (stabilizes the cycle)– Not workable in practiceNot workable in practice
Annually Balanced BudgetAnnually Balanced Budget
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 77
Budget PhilosophiesBudget Philosophies
Cyclically Balanced BudgetCyclically Balanced Budget
Annually Balanced BudgetAnnually Balanced Budget
Functional FinanceFunctional Finance– Balancing the budget is of secondary Balancing the budget is of secondary
importanceimportance– Primary focus is on stabilizing economyPrimary focus is on stabilizing economy
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 88
Chapter 10 TopicsChapter 10 Topics
10.110.1 Deficits, Surpluses & Debt: Deficits, Surpluses & Debt: Definitions & PhilosophiesDefinitions & Philosophies
10.210.2 The Public Debt: Facts & Figures The Public Debt: Facts & Figures
10.310.3 False Concerns False Concerns
10.410.4 Substantive Issues Substantive Issues
10.510.5 Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 99
The Public DebtThe Public Debt: : Facts & FiguresFacts & Figures
Government of Canada Public Debt, Selected Years
0
100
200
300
400
500
600
700
1926
1929
1940
1946
1954
1960
1966
1969
1973
1975
1979
1983
1988
1991
1997
2000
2002
Gro
ss f
eder
al p
ub
lic
deb
t (b
illi
on
s)
0
20
40
60
80
100
120
140
160
% o
f G
DP
gross federal public debt (billions)
% of GDP
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1010
The Public DebtThe Public Debt: : Facts & FiguresFacts & Figures
CausesCauses WarsWars RecessionsRecessions Lack Of Political WillLack Of Political Will
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1111
The Public DebtThe Public Debt: : Facts & FiguresFacts & Figures
Quantitative AspectsQuantitative Aspects Debt & GDPDebt & GDP
– relative size of the debt now decreasingrelative size of the debt now decreasing International ComparisonsInternational Comparisons
– our debt is 4our debt is 4thth highest as % of GDP among highest as % of GDP among world’s industrialized nationsworld’s industrialized nations
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1212
Global Perspective 10.1Global Perspective 10.1
Public Debt: International Comparisons
0 50 100 150
AustraliaDenmark
U.K.Finland
United StatesGermanySweden
NetherlandsFrance
SpainCanadaBelgium
ItalyJapan
% of GDP, 2002
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1313
The Public DebtThe Public Debt: : Facts & FiguresFacts & Figures
Quantitative AspectsQuantitative Aspects Debt & GDPDebt & GDP International ComparisonsInternational Comparisons Interest ChargesInterest Charges
– recently have begun to decline (as % of recently have begun to decline (as % of GDP)GDP)
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1414
The Public DebtThe Public Debt: : Facts & FiguresFacts & Figures
Interest Payments as % of GDP, Selected Years
0
1
2
3
4
5
6
7
1926
1929
1940
1946
1954
1960
1966
1969
1973
1975
1979
1983
1988
1991
1997
2000
2002
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1515
The Public DebtThe Public Debt: : Facts & FiguresFacts & Figures
Quantitative AspectsQuantitative Aspects Debt & GDPDebt & GDP International ComparisonsInternational Comparisons Interest ChargesInterest Charges OwnershipOwnership
– foreign-owned debt an issueforeign-owned debt an issue
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1616
Ownership of Canada's Public Debt in 2002Total debt: $540 billion
Public & chartered
banks75%
Bank of Canada8%
Non-residents17%
Figure 10-1Figure 10-1
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1717
Chapter 10 TopicsChapter 10 Topics
10.110.1 Deficits, Surpluses & Debt: Deficits, Surpluses & Debt: Definitions & PhilosophiesDefinitions & Philosophies
10.210.2 The Public Debt: Facts & Figures The Public Debt: Facts & Figures
10.310.3 False Concerns False Concerns
10.410.4 Substantive Issues Substantive Issues
10.510.5 Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1818
False ConcernsFalse Concerns
BankruptcyBankruptcy– RefinancingRefinancing– TaxationTaxation
Burdening Future GenerationsBurdening Future Generations– Canada owes a substantial portion of the Canada owes a substantial portion of the
public debt to itselfpublic debt to itself
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 1919
Chapter 10 TopicsChapter 10 Topics
10.110.1 Deficits, Surpluses & Debt: Deficits, Surpluses & Debt: Definitions & PhilosophiesDefinitions & Philosophies
10.210.2 The Public Debt: Facts & Figures The Public Debt: Facts & Figures
10.310.3 False Concerns False Concerns
10.410.4 Substantive Issues Substantive Issues
10.510.5 Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2020
Substantive IssuesSubstantive Issues
Income DistributionIncome Distribution IncentivesIncentives External DebtExternal Debt Crowding-Out & the Stock of CapitalCrowding-Out & the Stock of Capital
IIgg
Investment (billions of dollars)Investment (billions of dollars)
Rea
l in
tere
st r
ate
(per
cen
t)R
eal
inte
rest
rat
e (p
erce
nt)
Increasing the debt mayIncreasing the debt mayput upward pressure onput upward pressure oninterest rates. The higher interest rates. The higher interest rates may reduce interest rates may reduce private Investment (Iprivate Investment (Igg))
1616
1414
1212
1010
88
66
44
22
005 10 15 20 25 30 35 405 10 15 20 25 30 35 40
The Crowding Out EffectThe Crowding Out EffectFigure 10-2Figure 10-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2121
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2222
The Crowding Out EffectThe Crowding Out Effect
QualificationsQualifications Public investmentPublic investment Public-private complementaritiesPublic-private complementarities
IIgg
Rea
l in
tere
st r
ate
(per
cen
t)R
eal
inte
rest
rat
e (p
erce
nt)
1616
1414
1212
1010
88
66
44
22
005 10 15 20 25 30 35 405 10 15 20 25 30 35 40
The Crowding Out EffectThe Crowding Out EffectThe crowding out effect The crowding out effect may be partially offset may be partially offset by increased private by increased private investment, due to investment, due to improvements in improvements in infrastructureinfrastructure
Investment (billions of dollars)Investment (billions of dollars)
Figure 10-2Figure 10-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2323
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2424
Chapter 10 TopicsChapter 10 Topics
10.110.1 Deficits, Surpluses & Debt: Deficits, Surpluses & Debt: Definitions & PhilosophiesDefinitions & Philosophies
10.210.2 The Public Debt: Facts & Figures The Public Debt: Facts & Figures
10.310.3 False Concerns False Concerns
10.410.4 Substantive Issues Substantive Issues
10.510.5 Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2525
Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent
federal deficits & the debt were main federal deficits & the debt were main focus of fiscal policy during first half of focus of fiscal policy during first half of 1990s1990s
from a deficit of $40 billion in 1993, cuts from a deficit of $40 billion in 1993, cuts in spending & tax increases resulted in in spending & tax increases resulted in a surplus of $6 billion+ in 2003a surplus of $6 billion+ in 2003
Federal Budget Deficits & Surpluses (billions)Federal Budget Deficits & Surpluses (billions)
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2626
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2727
What to do with the Surpluses?What to do with the Surpluses?
Pay Down the Public DebtPay Down the Public Debt Reduce TaxesReduce Taxes Increase Public ExpendituresIncrease Public Expenditures Combinations of PoliciesCombinations of Policies
– Likely DirectionsLikely Directions
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 2828
Chapter 10 TopicsChapter 10 Topics
10.110.1 Deficits, Surpluses & Debt: Deficits, Surpluses & Debt: Definitions & PhilosophiesDefinitions & Philosophies
10.210.2 The Public Debt: Facts & Figures The Public Debt: Facts & Figures
10.310.3 False Concerns False Concerns
10.410.4 Substantive Issues Substantive Issues
10.510.5 Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent