The implications for the real sector and the long-run growth prospects of SEE
The Government Budget: Prospects and Implications
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Transcript of The Government Budget: Prospects and Implications
The Government Budget:Prospects and Implications
Andrew B. Abel
March 8, 1999
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National Saving and Wealth
• Income Statement Concepts• Output: Y = C + I + G + NX• National Saving: S = Y - C - G = I + NX
• Balance Sheet Concept• National Wealth = domestic capital stock + net
foreign assets
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Link Between Balance Sheet and Income Statement
• National Saving = Growth of National Wealth
• S = I + NX• I = growth of domestic capital stock
• NX = growth of net foreign assets
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Capital Gains and Saving
• Capital gain for an individual• Increases current income• If not spent:
• Increases current saving
• Increases wealth at end of year
• Capital gain can increase current and/or future consumption of individual
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Capital Gain in Closed Economy:National Perspective
• S = I
• If add capital gain to national output, Y• S would increase• Would have to add capital gain to I
• But I is intended to measure gross capital formation, which affects capacity to produce and consume in future
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Source of Capital Gains
• Increase in dividend, current or future• Reflects increase in current or future output
• Decrease in r• Does not reflect increased current or future
output
• Bubble • Unrelated to current or future output
bubblegr
DividendpriceAsset
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Capital Gains:Individual vs. National
• Increase ability of individual to consume
• May not affect ability of nation to consume
• Example: Stock market bubble• Increases wealth of individual owners• Does not increase ability of nation as a whole to
consume
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U.S. National Saving, 1998-III1998-III $billions % of GDP $/personGross Private Saving 1078.7 12.6 3991 Personal 12.6 0.1 47 Business 1066.1 12.5 3944
Gross Government Saving 395.7 4.6 1464 Federal saving 161.6 1.9 598 State and local saving 234.1 2.7 866
Total National Saving 1474.5 17.3 5455
Investment 1604.2 18.8 5935 Private 1364.4 16.0 5048 Federal 60.8 0.7 225 State and local 179.0 2.1 662Current Account Balance -231.6 -2.7 -857Investment + Current Account Balance 1372.6 16.1 5078
Statistical Discrepancy -102.0 -1.2 -377
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Gross Government Saving1998-III
1998-III $billionsGross Government Saving 395.7 Federal saving 161.6 Receipts 1858.8 Current expenditures 1766.7 Current surplus 92.0 Consumption of fixed capital 69.6 State and local saving 234.1 Receipts 1152.3 Current expenditures 1003.6 Current surplus 148.7 Consumption of fixed capital 85.4
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Budget Outlook under Current Policies
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-1, p.
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Deficits and Debt in Europe(percent of GDP)
CountryGeneral
GovernmentDeficit
GrossGovernment
DebtCountry
GeneralGovernment
Deficit
GrossGovernment
Debt1996 1997 1996 1997 1996 1997 1996 1997
Germany 3.8 3.3 60.3 61.5 Austria 3.9 2.5 69.8 68.1France 4.1 3.3 56.3 57.8 Denmark 1.6 0.1 69.9 67.3Italy 6.8 3.3 123.0 121.5 Finland 2.6 1.9 58.0 58.7UK 4.4 3.1 49.3 49.4 Greece 7.6 5.1 110.7 107.7Spain 4.4 3.2 69.5 69.0 Portugal 4.0 2.9 70.8 69.2Netherlands 2.3 2.2 78.8 76.1 Ireland 1.0 1.6 76.4 72.3Belgium 3.4 2.9 130.0 127.1 Luxembourg 0.1 0.1 5.9 5.7Sweden 2.5 0.8 78.6 76.6 Maastricht
criteria3.0 60.0
Source: World Economic Outlook, International Monetary Fund, May 1997, Table 5, p. 27.
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Revenues as a Share of GDP(fiscal year)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-2, p. 45.
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Revenues by Source(fiscal year)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-3, p. 47
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Outlays
• Discretionary spending• Annual appropriation• Defense, education, transportation, ...
• Mandatory spending (Entitlements)• Eligibility rules and benefit formulas
• Offsetting receipts• e.g., drilling leases for Outer Continental Shelf
• Net interest
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OutlaysDiscretionary Spending
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.
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OutlaysEntitlements and Other Mandatory Spending
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.
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OutlaysNet Interest
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.
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CBO Budget Projections
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii.
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CBO Budget Projections
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii.
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Measures of Fiscal Policy
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16.
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Measures of Fiscal Policy
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16.
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Projections of Federal Debt
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-3, p. 38.
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Trust Fund Surpluses(fiscal year, billions of dollars)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-4, p. 41.
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Burden of the Debt
• Debt ceiling
• raised to $5500 billion in March 1996
• raised to $5950 billion in Balanced Budget Act of 1997
billions dollars perof dollars capita
Gross Federal Debt 5479 20,271Debt Subject to Limit 5439 20,123Debt Held by the Public 3720 13,763
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Two Views of Burden of Debt
• “We Owe it to Ourselves” ==> No Burden• $1759 billion held by gov’t is no burden• $3720 billion held by public is owed to public
• but foreigners own some of this debt
• Burden, even if U.S. citizens owned all of debt• Crowds out capital stock
• Reduces long-run wages and output per person
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Federal Interest Outlays(Fiscal year, billions)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 4-8, p. 79.
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0
0.2
0.4
0.6
0.8
1
1.2
1.4
1860 1880 1900 1920 1940 1960 1980 2000
Ra
tio
to
GD
PDebt-GDP Ratio in the U.S.
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Changes in Debt-GDP Ratio
• Debt-GDP Ratio:
• Growth of numerator: deficit• Primary deficit + net interest
• Growth of denominator: nominal GDP growth
GDP
B
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Factors Causing Debt-GDP Ratio to Rise
• Large Primary Deficits (deficit minus interest)
• Wars• Great Depression• 1980s and first half of 1990s
• High (Real) Interest Rates
• Low GDP growth• Great Depression
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Effect on Deficit of 1 Percentage Point Reduction in Measured CPI
(fiscal years, billions of dollars)
Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1998-2007, January 1997, p. 41.
1998 2000 2007 Revenues 1.9 10.5 44.2 Outlays Social Security -2.8 -10.7 -44.6 Debt Service -0.2 -2.0 -32.0 Other -0.9 -4.5 -19.3Total Outlays -3.9 -17.2 -95.9 Deficit -5.8 -27.7 -140.1
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Long-Run Deficit Projections(Calendar year, percentage of GDP)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-5, p. 43.
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Long-Run Debt Projections(Debt held by public, calendar year, percentage of GDP)
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 2-2, p. 44.
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Will Federal Debt Be Eliminated?
• Debt held by public• Projected to be zero in 2012
• Why might this projection prove incorrect?• Projected surpluses might not occur
• Policies to cut taxes/increase spending
• Recessions
• Social Security Trust Fund may sell bonds to public in exchange for equity
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Social Security:Demographic Time Bomb
Source: 1998 OASDI Trustees Report, Table II.F.19
Beneficiaries per 100 Covered Workers
20
30
40
50
60
70
80
1995 2005 2015 2025 2035 2045 2055 2065 2075
Intermediate
Low Cost
High Cost
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OASDI Trust Fund Ratio
0
100
200
300
400
500
600
1995 2005 2015 2025 2035 2045 2055 2065 2075
Intermediate
Low Cost
High Cost
Source: 1998 OASDI Trustees Report, Table II.F.20
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Possible Solutions
• Increase Contributions by Workers• Increase retirement age
• Reduce Benefits Paid to Retirees• Increase retirement age• Tax Social Security benefits
• Earn Higher Return on Assets in Trust Fund• Invest in equities
• Privatize Social Security• Individuals control allocation of assets• Transitional problems
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Clinton Plan: Use of Projected Surpluses, 15 Years
%Transfer to Social Security 62Transfer to Medicare 15Transfer to USA Accounts 11Military, education, research 11
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Surpluses, Deficits, and Debts*
• SS Surp. + On-Budget Surp. = Unified Surp.• SS Def. + On-Budget Def. = Unified Def.• SSTF = SS Surp. = - SS Def.
• Gross Debt = On-Budget Def. = - On-Budget Surp.
• Debt Held by Public = Unified Def. = - Unified Surp.
• -SSTF + Gross Debt = Debt Held by Public• Gross Debt = Debt Held by Public + SSTF *Ignores other off-budget items and trust funds
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Double Counting?
• Unified surplus results from SS surplus• SS surplus increases SSTF anyway
• Transfer 62% of projected unified surplus to Social Security• SSTF = SS Surplus + Transfer• Gross Debt = Unified Deficit + Transfer• Unified deficit and debt held by public unchanged
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Illustration of Transferto Social Security
YearTransfer ? No Yes No YesSS Surplus 138 138 217 217On-budget surplus -7 -7 164 164Unified surplus 131 131 381 381Transfer to SSTF 0 81 0 236SSTF 138 219 217 453Debt held by public -131 -131 -381 -381Gross debt 7 88 -164 72
2000 2009