Transcript Debt

DEFICIT VS. DEBT
FLOW VS. STOCK
Chapter 15 part 3
Defining Debt and Assets
Debt is accumulated deficits minus
accumulated surpluses
• Debt is a stock, defined at a point in time
DEFICITS AND SURPLUSES ARE FLOW
CONCEPTS, DEFINED FOR A PERIOD OF TIME
Debt is a
stock,
defined at a
point in
time
Debt
Debt is accumulated deficits minus
accumulated surpluses
• Debt is a stock, defined at a point in time
Debt = Accumulated Deficits + Accumulated Surpluses
• Deficit
Increases
the Debt
• Surpluses
Reduce the
Debt
• If a country has more
surpluses than deficits, the
accumulated surpluses minus
accumulated deficits are a
part of its assets
Defining Surpluses and Debt
• A surplus is an excess of
revenues over payments.
• A deficit is a shortfall of
revenues over payments.
The Definition of Debt and Assets
• Debt is accumulated deficits minus
accumulated surpluses.
• Deficits and surpluses are flow
concepts.
• Debt is a stock concept.
Long-Run Implications


U.S. government budget accounting
is calculated on the basis of fiscal
years.
Persistent budget deficits have longrun consequences because they lead
to an increase in public debt.
A String of Deficits
Budget Surpluses
Budget Deficits
1970 19721974 19761978 1980 1982 19841986 1988 19901992 1994 1996 1998 2000 2002
The U.S. Government Has Always Been in
Debt Except
• 1835-36: Debt Free! – The U.S. was
completely out of debt by 1835.
• The Mexican-American War (1846-48) caused
a four-fold increase in the debt
The Public Debt
• Differentiating between the Deficit and the
Debt
– The deficit occurs when federal government spending is
greater than tax revenue
– The debt is the cumulative total of all the federal budget
deficits less any surpluses
• Suppose that our deficit declined one year from $200 billion to
$150 billion
• The national debt would still go up by $150 billion
• So every year that we have a deficit – even a declining one – the
national debt will go up
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12-48
The Public Debt
National Debt, 1975-2000
6
5
4
3
2
1
0
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Economic Report of the President, 2000
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12-49
How it works?
• The U.S. Treasury must sell new
bonds to pay for a deficit and
refinance previously issued
bonds as they come due
Debt Management
 Debt, as a summary measure of a nation’s
financial situation, needs to be judged in
relation to a nation’s assets
 When the government runs a deficit, it might
be spending on projects that increase its
assets
 If the assets are valued at more than their
costs, then the deficit is making society better
off
Debt
Foreign
individuals and
firms (25%)
U.S. individuals and
firms (24%)
U.S. government
agencies (42%)
Federal Reserve
(9%)
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ownership of the Debt
Other U.S.
government
trust funds,
12%
Social Security
trust fund, 18%
Federal
Reserve, 11%
In 2012
Difference Between
Individual and Government Debt
1. The government lives forever; people don’t
2. The government can print money to pay its debt;
people can’t
3. Government owes much of its debt to itself (to its
own citizens)
• Internal debt is government debt owed to other
governmental agencies or to its own citizens
• External debt is government debt owed to
individuals in foreign countries
Difference Between
Individual and Government Debt
1
• The government lives forever;
people don’t
2
• The government can print
money to pay its debt; people
can’t
3
• Government owes much of its
debt to itself (to its own citizens)
•Internal debt is
government debt owed to
other governmental
agencies or to its own
citizens
•External debt is
government debt owed to
individuals in foreign
countries
U.S. Budget Deficits as Percentage of
GDP
Deficits and debt relative to
Deficits as percentage
of GDP
10
GDP provide measures of a
country’s ability to pay off a
deficit and service its debt
0
-10
-20
-30
1900
1920
1940
1960
1980
2000
2020
U.S. Debt as Percentage of GDP
Debt as Percentage of
GDP
100
75
50
25
1800
1840
1880
1920
1960
2000
‘20
Ignore the
Absolute Figure
when it comes
to Deficit and
Debt!
Measure Deficit and
Debt as a
Percentage of GDP!
Debt / GDP =
Debt to GDP Ratio
READ THE SECTION ON THE DEBT
BURDEN
U.S. Debt Compared to Foreign Debt
82%
82%
80%
68%
52%
The U.S. debt does not
appear so large when
compared to the debts of
some other countries in
the early 2000s
42%
37%
23%
Debt as a Percentage of GDP
Federal Interest Payments Relative to
GDP
Interest payments as
percentage of GDP
3.5
Interest rates fell and
surpluses reduced the
total debt
High interest rates
and large increases
in debt
3.0
2.5
2.0
1.5
1.0
0.5
1945
1955
1965
1975
1985
1995
2005
2015
Chapter Summary
 A deficit is a shortfall of revenues under payments
 A surplus is the excess of revenues over payments
 Debt is accumulated deficits minus accumulated surpluses
 Deficits and surpluses are summary measures of a budget
 A cyclical deficit is that part of the deficit that exists because the
economy is below or above potential output
 A structural deficit is that part of a budget deficit that would exist
even if the economy were at its potential level of output
Chapter Summary
 A real deficit is a nominal deficit adjusted for the effect of
inflation
 A country’s debt must be judged in relation to its assets
 Government debt and individual debt differ
 Deficits, surpluses, and debt should be viewed relative to GDP
because this ratio better measures the government’s ability to
handle the deficit and pay off the debt
 Since 2008, the U.S. has run significant deficits and the debt-toGDP ratio has risen to over 100 percent