Government Budget

Government Outlays

government purchases(G): expenditures on currently produced goods and services (government consumption) or capital goods (government investment).

transfer payments(TR): payments made to individuals, which the government does not receive current goods or services.

examples:

Social Security payments

military and civil service pensions

unemployment insurance

welfare payments

Medicare

net intrest payments (INT): intrest paid to the holders of government bonds minus the intrest received by the government. (outstanding government loans, which increase with higher rates of government borrowing)

Subsidies

Another minor category included in government outlays is subsidies less surpluses of government enterprises. Subsidies are government payments that are implemented to affect the production and prices of goods

Taxes

personal taxes- the largest form of government taxes, includes personal income and property taxes

16th Amendment: in 1913 this bill legalized income taxes

contributions for social insurance- primarily Social Security taxes

inderect business taxes- sales tax

corporate taxes- taxes received from corporate profit

Deficit

A budget deficit occurs when outlays exceed revenue collected from taxes.

current deficit identifies how much the government will have to borrow to cover its expenditures

  current deficit = outlays - tax revenue
                  = (government purchases + transfers + net interest) - tax revenues
                  = (G + TR + INT) - T

primary deficit excludes net intrest from government outlays, since net intrest does not represent current program costs but the cost of past expenditures financed from government borrowing. Primary deficit identifies whether or not the government will be able to aford current programs.

  primary deficit = outlays - net interest - tax revenues
                  = government purchases + transfers) - tax revenue
                  = (G + TR) - T

Effects on Macroeconomy

Fiscal policies can have real affects on important economic factors, such as output, employment and prices.

Aggregate Demand

?G → ?C → ?S

IS → shifts up & rt.

AD → shifts up & rt.

Ricardian Equivalence

The Classical model assumes that with a lump-sum tax, no changes occur in desired national savings, so the IS and AD curves remain unaffected

Keynesian approach

The Keynesian model shows how taxes can influence household saving decisions, stating taxes directly affect household disposable income and desired consumption. Keynsian economists advocate government intervention and the use of fiscal policy to stabalize the economy and maintain full employment.

Automatic Stabilizers

The budget deficit tends to rise during periods of economic recession and fall during economic booms.

full-employment deficit: what the deficit would be at full-employment level

The government has created provisions, which are inherent to the budget, that cause government expenditures to automatically rise during a recession. This occurs without legislative action.

examples:

unemployment insurance
income tax system

Government Capital Formation

Government capital is long-lived physical assets, which affect future production

Incentives

?T → changes in financial rewards

affects S & I

average tax rate: taxes/ before-tax income

     ?average tax rate → ? amount of labor supplied

the more you, work the more money you will get; the same % of tax will be removed from your income

marginal tax rate: fraction of additional dollar of income that must be paid in taxes

  ?marginal tax rate → ? amount of labor supplied

if you work more, after-tax rewards decline

Deficit vs. Debt

government budget deficit-a flow variable; the difference between expenditures and tax revenues or the change in debt for a current year

government debt-a stock variable, the total value of government bonds outstanding at any time

Debt-GDP Ratio

GDP is an important aspect when measuring debt. A high GDP means more resources are available to pay principle or intrest payments on government bonds

Budget Deficit

Contents