Warm up

What are the dates for the US Government’s fiscal year?

Deficits, Surpluses, and the National Debt

Chapter 10 sec4

From the Deficit to the Debt

• Throughout United States history, the federal government has practiced deficit spending, or spending more than the revenues it collected.

Historically

• Historically, the largest federal deficits happened during World War II. The budget however, had a surplus by 1947, that lasted until the 1980s.

• When the budget runs a deficit, the Treasury Department sells bonds to the public to raise money.

• The federal debt is the total amount the government has borrowed from investors to finance its deficit spending over its long history.

• The total federal debt has grown to over $14.2 trillion.

• Debt to the Penny (Daily History Search Application)

That’s a stack of $100 bills over 6,800 miles

high!

Impact of the National Debt

• The federal debt causes a transfer of purchasing power from the private to the public sector.

• The larger the federal debt, the larger the interest payments, and the more taxes needed to pay.

Taming the Deficit

Congress tried to mandate a balanced budget in 1991 through the Gramm-Rudman-Hollings Act.

Whip it, Good!

“Crowding-Out Effect”

• In selling bonds to raise money, the federal government competes with the private sector for scarce resources, leading to higher-than-normal interest rates.

This is the “crowding-out effect”.

The Balanced Budget Agreement of 1997

• Congress gave the president a line-item veto, but the Supreme Court found it unconstitutional.

• The Balanced Budget Agreement of 1997 followed, with rigid spending caps so Congress could balance the budget by 2002.

• In 1999 Congress increased defense spending and cut taxes; as a consequence, they had to cut popular programs such as health, education, and veterans’ programs.

External Shocks

• Due to the 2001 recession, September 11th, the war on terrorism, and the continued growth of entitlements, the government is facing record budget deficits.