Federal Budgets and Public Policy

1. Federal Budgets and Public Policy • The federal budget process • Problems with the process • Rationale for deficits • The historical records • The national debt • Interest on the national debt • Who does the federal government owe? • The ‘crowding out’ view • The intergenerational view

2. Revenue and appropriations bills start in the House Ways and Means Committee. The federal fiscal year runs from October 1 to September 30.

4. Problems with the budget process Continuing resolutions Uncontrollable budget items such as entitlements and interest on the national debt. No separate capital budget About three-fourths of federal spending in each fiscal year is determined by existing law

5. Federal outlays since 1960 • Defense’s share of federal outlays declined since 1960 and redistribution increased

6. What is a federal deficit? If federal outlays exceed (net) tax receipts in a fiscal year, then we have a federal deficit

7. Federal deficits have a stimulatory effect on the economy G Remember that government expenditures are an injection and net taxes are a leakage Real GDP NT

8. Many economists believe the federal government budget should be roughly balanced when the economy is a full-employment.

9. Budget is structurally-balanced at full-employment G, NT NT G Deficit 0 Y YF Real GDP

10. The Congressional Budget Office Now Projects the Federal Deficit for fiscal year 2008 at $475 billion.

11. After decades of federal budget deficits, surpluses appeared from 1998 to 2001, but deficits are back

12. During the 1990s, federal outlays declined relative to GDP and revenues increased, turning deficits into surpluses, but not for long

13. Government outlays as a percentage of GDP declined between 1994 and 2007 in most major economies

14. In the case of a federal deficit, the Treasury must borrow. The national debt is the accumulated borrowing of the federal government in all previous fiscal years, minus what has been repaid

15. For updated information, check the National Debt Clock

16. Is a large national debt a bad thing? • Arguments against a large national debt include: • The “burden on future generations” argument. • A large national debt means that a significant share of federal spending must be allocated for interest payments—leaving less for other priorities. • A large national debt makes the U.S. too dependent on foreign financial inflows. • Federal borrowing “crowds out” private sector borrowing units—i.e., firms and households.

17. “[W]e (the U.S.) owe $5.7 trillion in debt and if we don’t pay it off, our children and our grandchildren are going to have to.” Congressman Marion Berry, in a speech to the Jonesboro Lions Club on April 16, 2001.

18. Interest payments as a Percent of Federal Expenditures (Annual) www.economagic.com

19. Rule-of-Thumb As long as the debt grows by the same percentage as nominal GDP, the ratios of debt to GDP will remain constant. In this case, the government can continue to pay interest on its rising debt without increasing the average tax rate in the economy.

21. Relative to GDP, US net public debt in 2007 was about average for major economies

23. Largest foreign holders of US treasury securities as of June 2007 (in billions and as percent of foreign held)