Deficits, Surpluses, & the Public Debt

Deficits, Surpluses, & the Public Debt SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 1

In this chapter you will learn 10.1 The definitions of budget surplus, budget deficit, the public debt, and the diverse budget philosophies 10.2 About the recent Canadian budget surpluses, deficits, and public debt 10.3 The misconceptions about budget deficits and the national debt 10.4 The substantive issues about budget deficits and the public debt 10.5 About recent budgetary surpluses 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 2

Chapter 10 Topics 10.1 Deficits, Surpluses & Debt: Definitions & Philosophies 10.2 The Public Debt: Facts & Figures 10.3 False Concerns 10.4 Substantive Issues 10.5 Deficits & Surpluses: 1990 to the Present 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 3

Deficit & Debt: Definitions Budget Deficit Annual amount by which government expenditures exceed taxes E.g. 1996-97 deficit = $13.5 billion Public Debt Accumulation of all past deficits & surpluses E.g. 2002 public debt =$640 billion 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 4

Budget Philosophies Annually Balanced Budget G = T every year Intensifies the cycle (pro-cyclical) Some believe this approach constrains an undesirable expansion of the public sector 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 5

Budget Philosophies Annually Balanced Budget Cyclically Balanced Budget G = T over each business cycle Deficits in recessionary downswings Surpluses in inflationary upswings Counter-cyclical (stabilizes the cycle) Not workable in practice 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 6

Budget Philosophies Annually Balanced Budget Cyclically Balanced Budget Functional Finance Balancing the budget is of secondary importance Primary focus is on stabilizing economy 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 7

1926 1929 1940 1946 1954 1960 1966 1969 1973 1975 1979 1983 1988 1991 1997 2000 2002 Gross federal public debt (billions) % of GDP The Public Debt: Facts & Figures Government of Canada Public Debt, Selected Years gross federal public debt (billions) % of GDP 700 600 500 400 300 200 100 0 160 140 120 100 80 60 40 20 0 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 9

The Public Debt: Facts & Figures Causes Wars Recessions Lack Of Political Will 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 10

The Public Debt: Facts & Figures Quantitative Aspects Debt & GDP relative size of the debt now decreasing International Comparisons our debt is 4 th highest as % of GDP among world s industrialized nations 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 11

Global Perspective 10.1 Public Debt: International Comparisons Japan Italy Belgium Canada Spain France Netherlands Sweden Germany United States Finland U.K. Denmark Australia 0 50 100 150 % of GDP, 2002 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 12

The Public Debt: Facts & Figures Quantitative Aspects Debt & GDP International Comparisons Interest Charges recently have begun to decline (as % of GDP) 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 13

1926 1929 1940 1946 1954 1960 1966 1969 1973 1975 1979 1983 1988 1991 1997 2000 2002 The Public Debt: Facts & Figures Interest Payments as % of GDP, Selected Years 7 6 5 4 3 2 1 0 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 14

The Public Debt: Facts & Figures Quantitative Aspects Debt & GDP International Comparisons Interest Charges Ownership foreign-owned debt an issue 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 15

Figure 10-1 Ownership of Canada's Public Debt in 2002 Total debt: $540 billion Non-residents 17% Bank of Canada 8% Public & chartered banks 75% 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 16

False Concerns Bankruptcy Refinancing Taxation Burdening Future Generations Canada owes a substantial portion of the public debt to itself 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 18

Substantive Issues Income Distribution Incentives External Debt Crowding-Out & the Stock of Capital 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 20

Real interest rate (percent) The Crowding Out Effect Figure 10-2 16 14 12 10 8 6 4 2 Increasing the debt may put upward pressure on interest rates. The higher interest rates may reduce private Investment (I g ) I g 0 5 10 15 20 25 30 35 40 Investment (billions of dollars) 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 21

The Crowding Out Effect Qualifications Public investment Public-private complementarities 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 22

Real interest rate (percent) The Crowding Out Effect 16 14 12 10 8 6 4 Figure 10-2 The crowding out effect may be partially offset by increased private investment, due to improvements in infrastructure 2 I g 0 5 10 15 20 25 30 35 40 Investment (billions of dollars) 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 23

Deficits & Surpluses: 1990 to the Present federal deficits & the debt were main focus of fiscal policy during first half of 1990s from a deficit of $40 billion in 1993, cuts in spending & tax increases resulted in a surplus of $6 billion+ in 2003 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 25

Federal Budget Deficits & Surpluses (billions) 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 26

What to do with the Surpluses? Pay Down the Public Debt Reduce Taxes Increase Public Expenditures Combinations of Policies Likely Directions 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10 27