Deficits, Surpluses, and the National Debt

1. Deficits, Surpluses, and the National Debt

2. From Deficits to Debt • Because of deficit spending, the national debt has increased dramatically • Sometimes, the government is forced to spend more than it collects because unexpected developments cause a drop in revenues or a rise in costs

3. Predicting the Deficit • Depends on the way expenditures are reported and the state of the economy • Why do you think the wars in Iraq and Afghanistan have been financed through “supplemental requests?” • Changes in the economy affect budget projections. • Economic growth could shrink the deficit

4. Deficits Add to the Debt • When the federal government runs a deficit, it must finance the revenue shortage by borrowing • Does this by selling U.S. Treasury notes and securities to the public • The national debt grows whenever the government runs a deficit by spending more than it collects in revenues

5. A Growing Public Debt • Money the government owes itself • Ex: Trust funds • -Huh? • We TRUST the government with our federal tax dollars to put money away for us • Social Security • Medicare … etc • Does this money just sit in someone’s desk… NEIN!!!!! • They buy government securities until payment is due…

6. Public vs. Private Debt • The country can never go bankrupt • We owe most of the national debt to ourselves • Private debt is owed to others • Borrowing: • Private citizens: make plans to repay debt by certain date • Government: issues new bonds to pay off old bonds • Purchasing power: • Private individuals: give up purchasing power because they have less money to buy goods and services • Government: does not give up power because the taxes collected from some groups are transferred to others

7. Impact of the National Debt • The national debt affects the distribution of income and transfers purchasing power from the private to public sector • The more the government borrows today, the more future generations will have to pay • What other effects does the national debt have on the nation?

8. Transferring Purchase Power • When the public debt increases, taxes increase and people have less money for themselves • One generation to the next • Accumulation of debt by one generation can thus reduce the economic well-being of the next

9. Reducing Economic Incentives • Government can reduce economics incentives if it appears to spend money in a careless manner

10. Crowding Out • When the federal government uses deficit spending, it must borrow money in financial markets • Borrowing can drive interest rates up, forcing borrowers to pay more for the temporary use of funds • If private borrowers cannot afford the higher interest rates, they are squeezed out of the market

11. Redistributing Income • The national debt and the tax structure can impact the distribution of income • The people paying less in taxes would benefit from the tax policy • How does the transfer of purchasing power between generations affect you?

12. Reducing Deficits and the Debt • Congress has tried a number of measures to reduce deficits and national debt • Legislative failures (come up with new mandates / laws) • Moving back SS age to collect • Raising revenues (Higher Taxes / lower taxes) • How would this work? • What do you think has stopped the government from doing making this reduction possible since 2001?

13. Reducing Spending • One way to control the deficit is by reducing federal spending • What events in 2001 have added to the national debt? • Do you think that the federal government will reduce the national debt in the next 15 years?