Federal Budget Deficit
General Information
Definition: The opposite of a budget surplus, a deficit is when the government spends more money than it takes in. Essentially government expenditures and transfer payments are greater than the revenue from taxes. This is assuming that taxes are the main form of revenue.
G>T = A budget deficit
G= federal, state, and local government spending on currently produced goods and services
T= federal, state and local tax revenue
INCLUDE Graph
Stabilization Policy
-In terms of stabilization policy, the budget has three variables that affect macroeconomic goals:
- Government purchases of goods and services
- Government transfer payments
- Government tax reciepts
-How does the government budget deficit work as an automatic stabilizer for economic activity?
-As GDP increases then taxes increase as well. The revenue from taxes in higher so the deficit is smaller in times economic prosperity. As this happens, fiscal policy becomes more resrictive and this in turn dampens the expansion.
-A shock the causes economic activity to fall means that the deficit will increase because tax revenues are smaller then before. In addition, in times of low economic activity, unemployment is high and so are government transfer payments like unemployment compensation, and thus government expenditures rise. This cushions the fall in national income.
-Are government budget deficits good or bad?
- This can depend on what the excesses expenditures are being used for.
- For example: if the government borrows to deal with a recession, to fund self-defense, or for public investment it is not a bad thing.
- Obviously wasteful expenditures would be bad
-Ways to deal with the federal budget deficits:
- revenue from taxes
- government bonds: leads to open market operations
- money creation: leads to sustained inflation
-In the US, the government is not allowed to issue new currency to pay off bills.
- Must fix deficit with an increase in taxes or by issuing bonds to the public
ADD GRAPH 636 from moneny and banking book
