(c) , Gary R. Evans. May be used only for non-profit educational purposes without permission of the author.

Transcription

1 U.S. Government Budget and Fiscal Policy Spending, Taxing, Deficits and the Debt I'm thinking that if I stand in front of the White House long enough, President Obama will ask me to come inside and fix things. (c) , Gary R. Evans. May be used only for non-profit educational purposes without permission of the author. Lecture Objectives Review categories of spending and taxing Define deficits and surpluses Define connection between deficit and debt Show how the debt is financed Discuss entitlements and long-term commitments Discuss the special problem of Social Security and Medicare 1

2 Fiscal policy Policy Actors concerns itself with the spending and taxing practices of the U.S. Government The policy body two houses of Congress, President, and Congressional Budget Office (CBO) and Office of Management and Budget (OMB) Policy agencies U.S. Treasury and agencies of the U.S. Government (such as Social Security Agency) Outlays Definitions Monetary disbursements of the U.S. Government. Revenues Net receipts of the U.S. Government from parties outside of government, typically from taxes. Deficit/Surplus The total of all outlays minus revenues. When negative, the difference is the deficit, when positive, a surplus. U.S. Public Debt The total sum of all outstanding U.S. Treasury securities. Net debt refers to the amount in public hands (some debt is held internally by agencies) 2

3 Useful facts about the federal budget Each fiscal year starts on October 1. FY 2013 started on Oct. 1, Budgetary timetable Early February President submits his budget: advisory April 15: Congress submits their version of budget June 30: Deadline for passage of 13 appropriations bills (never met) Federal debt ceiling, established in 1941, has been raised more than 70 times!! Outlays, Revenues and Deficit Major outlay categories by function % Social Security Defense Medicare Income Security Other Medical Interest on Debt Other TOTAL OUTLAYS 1, , , , less REVENUES 1, , , , equals SURPLUS /DEFICIT , , fiscal year began October 1, Budget deficit for 2009 was $1.413T. Source: Budget of the United States Government, FY 2014, Historical Tables, Table

4 Note: The amount of "other" is about 1/3 the size of the deficit. Federal Outlays (2012) 14% ($3,537.1 billion) 22% 6% Social Security 10% 19% Defense Medicare Income Security Other Medical Interest on Debt Other 15% 600 Income Security: 601 General retirement and disability insurance (excluding social security) 602 Federal employee retirement and disability 603 Unemployment compensation 604 Housing assistance 605 Food and nutrition assistance 609 Other income security Total, Income Security 14% 8, ,418 93,602 40, , , ,860 Other medical is Medicaid, health research, CDC, and VA. Red Ink table 4.2 Unified Budget of the United States Government Net Outlays by Function, $ Billions, Select Years Outlays by Function Number % Out 90 % Out 12 %Grth 90 Social Security % 20.7% 194.0% National defense % 19.9% 135.8% Income Security % 16.9% 306.4% Medicare % 13.7% 395.1% Health (excluding Medicare) % 10.5% 545.6% Net Interest % 6.5% 24.9% Educ, trmg, employment % 2.9% 160.8% Veterans benefits % 3.6% 337.1% Transportation % 2.6% 215.3% Justice % 1.6% 461.0% International affairs % 1.3% 231.2% Natural resources envirnmt % 1.3% 166.1% Gen science, space, techn % 0.8% 104.9% Comm and regn dvlpmnt % 0.7% 180.0% General government % 0.7% 138.3% Agriculture % 0.6% 72.5% Energy % 0.3% 269.7% Housing credit % -0.4% % Undistributed offsetting receipts % -2.4% 136.3% Total Outlays 1, , , ,537.1 Total Revenues 1, , , ,450.2 Budget Deficit , , % 36.8% Source: Budget of the U.S. Government, FY2014, Table 3.1 Historical Tables of the U.S. Budget. Sums to 30.6% while deficit is 36.8% Top 5 categories (incl non-medicare health) are 82% of the budget. 4

5 4,000 3, ,000 Federal Receipts and Outlays $ billions 2001 tax cut 2,500 2,000 1,500 1, tax cut Receipts Outlays Source: Budget of the United States Government, Fiscal Year 2014, Historical Tables, Table 1.1 U.S. Government Budget Surpluses and Deficits $ Billions Surpluses Deficits ,000-1,200-1,400 Nixon Ford Carter Reagan Bush I Clinton Bush II Obama -1, Source: Budget of the United States Government, Fiscal Year 2014, Historical Tables, Table 1.1 5

6 Financing the U.S. Government budget deficit The budget deficit is financed by the sale of interest-bearing U.S. Treasury securities to the public, including corporations, financial institutions, and foreign investors, including foreign central banks of countries with which we have been running a trade deficit, like the Bank of China, OPEC funds, etc., and dt to the Fd Federal lr Reserve System (indirectly) The securities differ largely by the maturities. These are the classes of securities sold: U.S Treasury Securities Offered to the Public Security Maturity Now Offered Bills: Less than one year 4,13,26 and 52 weeks Notes: More than one to ten years 2,3,5,7,9 and 10 * Bonds: 20 to 30 years 30 years * Inflation Indexed: 5, 10, and 20 years All * * These are sometimes approximate. E.g. a 30 year bond might have a maturity of 29 years and 11 months. These are sold at competitive interest rates and they vary from maturity to maturity and the vary over time as market interest rates change. Current UST rates will be shown in a later slide. Note: When a debt security matures, it is "rolled over" by issuing a new one. Total U.S. Treasury Debt Total U.S. Treasury Securities Outstanding Gross and Net Public Debt $ billions December 2012 Instrument Amount Marketable 11,033.4 Bills ,626.5 Notes 7,320.9 Bonds 1,236.7 Inflation-indexed Non-Marketable 5,394.1 Government Account 4,846.1 Non-marketable privately held TOTAL PUBLIC DEBT: 16,457.6 NET PUBLIC DEBT: 11,611.5 (Net is total less govt. account but not less FRS holdings) Source: US Treasury Bulletin March 2013 Tables FD-1 FD-2 The net public debt is the true level of the indebtedness of the U.S. Government. It is debt owed to outside parties (including the FRS). Government account debt largely consists of trust fund debt and will be explained in the next lecture. By this next June, the net public amount will be about $12 trillion. Data are kept with 104 data. 6

7 $ billions Total Public Federal Debt Net excludes marketable debt held by 14 FRS ($1.646 Tr in 2012) but not the debt held by other central banks, and 12 does not include internally-held agency debt, such as the Medicare 10 and Social Security trust funds (this will be explained more in the lecture 8 about entitlements). 2 Because surpluses this is external debt, this is the one that matters Gross Federal Debt Net Federal Debt Total Marketable Source: Budget of the United States Government, Fiscal Year 2014, Historical Tables, Table 7.1 Who owns the U.S. Treasury Debt? Figure 2 Ownership of Privately Held U.S. Treasury Debt December 1995 September 2012 Billions $ % total Billions $ % total Deposit institutions % % US Savings Bonds % % Private pension funds % % S&L govt pension funds % % Insurance companies % % Mutual funds % % State & local governments % % Foreign holdings % 5, % Other (mostly individuals) % 1, % Total privately held 3, % 9, % Memo: Total Debt: 16,066.2 Held by FRS & IG accounts: 6, % Source: U.S. Treasury Bulletin, March 2013, Table OFS-2 7

8 Interest on the Debt Federal Funds Target Rates January March 2012 Upper limit of 0.25 range $ billions FRS tightening Each 1% rise in rates adds about $80 billion in interest charges Budget surpluses Herein lies a long-term problem: the government is obliged to pay this, with a large chunk going overseas Low interest rates Source: Budget of the United States Government, Fiscal Year 2014, Historical Tables, Table % Net Interest as a % of Outlays When this gets above 15%, the debt will grow automatically This has fallen in recent years because of (originally) surpluses and (now) record low interest rates

9 200 Monthly (Seasonal) Budget Deficits (January 2007 March 2012) Jan 07 Mar 07 May 07 Jul 07 Sep 07 Total: $5,321,722 billion... for this time frame Nov 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 Source: U.S. Treasury Monthly Treasury Statement, March The Deficit as % of GDP European Union Standard (3%) Balanced budget standard (0%)

10 The Real Standard: Debt as % of GDP This is where we are being compared to Europe we look like Portugal and Spain here. Our current goal? Keeping this at 77% Gross Net Some general observations Short-term budget deficits can be caused by the decline in tax receipts during recessions Structural deficits, which are more harmful, have been caused more by tax cuts ( and ) than by increases in spending Spending has been largely independent of whatever President or political party has been in power Each deficit adds to the public debt, each surplus subtracts from it Deficits do stimulate the economy in the short run The primary long-run effect of deficits is through the need to finance and interest rates. 10

11 The fiscal effects of budget deficits Our models tell us that budget deficits should stimulate the economy in the short run The potential for such stimulation to be inflationary depends upon the starting point (context). There can be substantial damaging long-run effects of enduring budget deficits. The economic effect of deficits Loanable Funds model tells us that deficits can crowd out private borrowing This can be offset by "easy" FRS OMO policy Can also be offset by surge in supply of funds to markets during times of crisis or from foreign investors Therefore, deficits can be said to have a tendency to cause interest rates to rise r Due to rising budget deficits DF 2 DF 1 11

12 And once again: FRS intervention to keep rates low... r SF 1 because of OMO SF 2 e 1 e 2 This amounts to monetizing i the deficit DF 2 because of deficits DF 1 volume of credit Tax Sources 2012 ($ billion) Note: This is based upon gross collections before returns. 10% 32% 2% 56% Individual Income Taxes Corporate Income Taxes FICA Taxes Other Note: All but about 15% of federal taxes are paid by individuals. Source: IRS.gov tax stats at a glance, April 25,

13 Who pays income taxes: Five income groups, 2008, percentages 60% 50% 40% Total FY 2008 income taxes: $1,031,580, % 30% 20% 26.7% 20.8% 18.0% 21.7% 17.9% 22.5% Percentage returns filed Percentage taxes paid 10% 0% 0.2% Under $15K 1.8% $15K to $30K 5.5% $30K to $50K $50K to $100K 9.7% $100K to $200K 3.1% $200K or more Source: irs.gov SOI Tax Stats, 2008, aggregated from various tables including Table 1.1. Effective income tax rates Taxes paid as % of Adjusted Gross Income, % 21.8% 20% 15% Progressive, but excludes FICA and uses AGI, not pre-adjusted income. 12.6% 10% 8.4% 5% 2.1% 2.9% 57% 5.7% 0% Under $15K $15K to $30K $30K to $50K $50K to $100K $100K to $200K $200K or more Source: -SOI Tax Stats, 2008, aggregated from various tables including Table

14 The FICA/SECA Payroll Tax This tax is clearly regressive, offsetting some of the progressive structure of the income tax. The self-employed Social Security Tax was temporarily reduced from 12.4% to 10.4% by the 2010 Tax Relief Act. Employment (FICA/SECA) tax rates effective 2013 Social Security: Medicare: Employer/Employee (each) Self-employedemployed * 6.2% $113,700 cap 1.45% No cap 12.4% $113,700 cap 2.9% No cap Total (each): 7.65% 15.30% Total (combined): 15.30% The self-employed Social Security Tax was reduced temporarily from 12.4% to 10.4% by the 2010 Tax Relief Act. For 2011 the employee contribution was temporarily reduced to 4.2%, extended in December 2011 for all of the 2012 tax year. This grossly underfunded Social Security for that year. It was raised back up in January 2013 to the levels shown above. Source: IRS Publication 1038,