Long Term Effects

Future Living Standards

• Depend on-

1. National Saving
2. Productivity

National Saving

National Saving = Private Saving + Government Saving

If all other parts of national saving remain unchanged, national savings will fall as the federal deficit increases.

Reasons:

1. reductions in taxes → increase private consumption
2. increases in government spending for federal entitlement programs → increase private consumption
3. increases in government purchases → increase government consumption

Note: This switch from saving to consumption occurs regardless of whether the increased deficit is the result of increased current federal spending or tax reductions. The decrease in national saving results from the deficits' tendency to raise the fraction of income that is consumed.