Lecture Macroeconomics - Chapter 11: Deficits, surpluses, and the public debt

Chapter 11 presents deficits, surpluses, and the public debt. After studying this chapter you will be able to understand: What a budget deficit and a budget surplus are, and their connection to the public debt; about the recent history of Canada’s budget surpluses, deficits and public debt; the misconceptions about budget deficits and the national debt; the substantive issues about budget deficits and the public debt; the effect of the recent budgetary surplus.

Chapter 11 Deficits, Surpluses, & the Public Debt Public Mastercard PUBLIC VISA Public Mastercard PUBLIC VISA SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 In this chapter you will learn What a budget deficit and a budget surplus are, and their connection to the public debt About the recent history of Canada’s budget surpluses, deficits and public debt The misconceptions about budget deficits and the national debt The substantive issues about budget deficits and the public debt The effect of the recent budgetary surplus © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 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 E.g 2000 public debt =$650 billion © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 Budget Philosophies Annually Balanced Budget – G = T every year – Intensifies the cycle (pro-cyclical) – Politically responsible? © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 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 © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 Budget Philosophies Annually Balanced Budget Cyclically Balanced Budget Functional Finance – Balancing the budget is of secondary importance – Primary focus is on stabilizing economy (counter-cyclical policies) – May result in a large public debt © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 The Public Debt: Facts & Figures Government of Canada Public Debt, selected years gross federal public debt (billions) 700 160 600 140 120 500 100 400 80 300 60 200 % of GDP $ billions % of GDP 40 100 20 2000 1997 1994 1991 1988 1983 1979 1975 1973 1969 1966 1960 1954 1946 1940 1929 1926 end of year © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 10 Ownership of Canada's Public Debt in 2000 Figure 11-1 Bank of Canada 8% Foreigners 20% Public & chartered banks 72% Total debt: $651 billion © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 17 The Public Debt: Facts & Figures Quantitative Aspects Debt & GDP International Comparisons Interest Charges Ownership Accounting & Inflation © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 18 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 19 False Concerns Bankruptcy – Refinancing – Taxation Burdening Future Generations – most of the burden is on current taxpayers © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 20 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 21 Substantive Issues Income Distribution Incentives External Debt Crowding Out & the Stock of Capital © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 22 The Crowding Out Effect Figure 11-2 Increasing the debt may put upward pressure on interest rates The higher interest rates may reduce private Investment (Ig) Real interest rate (percent) 16 14 12 10 Ig 10 15 20 25 30 35 Investment (billions of dollars) © 2002 McGraw-Hill Ryerson Ltd 40 Macroeconomics, Chapter 11 23 The Crowding Out Effect Qualifications Public Investment Public-Private Complementarities © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 24 The Crowding Out Effect Figure 11-2 The crowding out effect may be partially offset by increased private investment, due to improvements in infrastructure Real interest rate (percent) 16 14 12 10 Ig 10 15 20 25 30 35 Investment (billions of dollars) © 2002 McGraw-Hill Ryerson Ltd 40 Macroeconomics, Chapter 11 25 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 26 Deficits & Surpluses: 1990-2000 deficits were enormous during the early 1990s budget surpluses appeared in late 1990s surpluses expected to grow through the 2000s © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 27 Federal Budget Deficits & Surpluses 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 Fig 11-3 10 -5 $billions -10 -15 -20 Annual Annual budget budget deficits deficits throughout throughout most most of of the the 1980s 1980s & & the the first first half half of of the the 1990s 1990s gave gave way way to to surpluses surpluses in in the Source: Department of Finance the late late 1990s 1990s -25 -30 -35 -40 © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 28 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 29 Options for the Surpluses Paying Down the Public Debt Reduce Taxes Increase Public Expenditures Combinations of Policies © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 30 Chapter 11 Topics Deficits & Debt: Definitions Budget Philosophies The Public Debt: Facts & Figures False Concerns Substantive Issues Deficits & Surpluses: 1990 to the Present Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 31 ... this chapter you will learn What a budget deficit and a budget surplus are, and their connection to the public debt About the recent history of Canada’s budget surpluses, deficits and public debt. .. debt The misconceptions about budget deficits and the national debt The substantive issues about budget deficits and the public debt The effect of the recent budgetary surplus © 2002 McGraw-Hill... Options for the Surpluses © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 11 The Public Debt: Facts & Figures Government of Canada Public Debt, selected years gross federal public debt (billions)