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The Government Budget: Prospects and Implications: 

The Government Budget: Prospects and Implications Andrew B. Abel March 8, 1999

National Saving and Wealth: 

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

Link Between Balance Sheet and Income Statement: 

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

Capital Gains and Saving: 

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

Capital Gain in Closed Economy: National Perspective: 

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

Source of Capital Gains: 

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

Capital Gains: Individual vs. National: 

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

U.S. National Saving, 1998-III: 

U.S. National Saving, 1998-III

Gross Government Saving 1998-III: 

Gross Government Saving 1998-III

Budget Outlook under Current Policies: 

Budget Outlook under Current Policies Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-1, p.

Deficits and Debt in Europe (percent of GDP): 

Deficits and Debt in Europe (percent of GDP)

Revenues as a Share of GDP (fiscal year): 

Revenues as a Share of GDP (fiscal year) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-2, p. 45.

Revenues by Source (fiscal year): 

Revenues by Source (fiscal year) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 3-3, p. 47

Outlays: 

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

Outlays Discretionary Spending: 

Outlays Discretionary Spending Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.

Outlays Entitlements and Other Mandatory Spending : 

Outlays Entitlements and Other Mandatory Spending Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.

Outlays Net Interest: 

Outlays Net Interest Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 4-1, p. 63.

CBO Budget Projections: 

CBO Budget Projections Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii.

CBO Budget Projections: 

CBO Budget Projections Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Summary Table 3, p. xviii.

Measures of Fiscal Policy: 

Measures of Fiscal Policy Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16.

Measures of Fiscal Policy: 

Measures of Fiscal Policy Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 1-3, p. 16.

Projections of Federal Debt: 

Projections of Federal Debt Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-3, p. 38.

Trust Fund Surpluses (fiscal year, billions of dollars): 

Trust Fund Surpluses (fiscal year, billions of dollars) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-4, p. 41.

Burden of the Debt: 

Burden of the Debt Debt ceiling raised to $5500 billion in March 1996 raised to $5950 billion in Balanced Budget Act of 1997

Two Views of Burden of Debt: 

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

Federal Interest Outlays (Fiscal year, billions) : 

Federal Interest Outlays (Fiscal year, billions) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 4-8, p. 79.

Debt-GDP Ratio in the U.S.: 

Debt-GDP Ratio in the U.S.

Changes in Debt-GDP Ratio: 

Changes in Debt-GDP Ratio Debt-GDP Ratio: Growth of numerator: deficit Primary deficit + net interest Growth of denominator: nominal GDP growth

Factors Causing Debt-GDP Ratio to Rise: 

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

Effect on Deficit of 1 Percentage Point Reduction in Measured CPI (fiscal years, billions of dollars): 

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.

Long-Run Deficit Projections (Calendar year, percentage of GDP): 

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.

Long-Run Debt Projections (Debt held by public, calendar year, percentage of GDP): 

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.

Will Federal Debt Be Eliminated?: 

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

Social Security: Demographic Time Bomb: 

Social Security: Demographic Time Bomb Source: 1998 OASDI Trustees Report, Table II.F.19

OASDI Trust Fund Ratio: 

OASDI Trust Fund Ratio Source: 1998 OASDI Trustees Report, Table II.F.20

Possible Solutions: 

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

Clinton Plan: Use of Projected Surpluses, 15 Years: 

Clinton Plan: Use of Projected Surpluses, 15 Years

Surpluses, Deficits, and Debts*: 

Surpluses, Deficits, and Debts* SS Surp. + On-Budget Surp. = Unified Surp. SS Def. + On-Budget Def. = Unified Def. DSSTF = SS Surp. = - SS Def. DGross Debt = On-Budget Def. = - On-Budget Surp. DDebt Held by Public = Unified Def. = - Unified Surp. -DSSTF + DGross Debt = DDebt Held by Public DGross Debt = DDebt Held by Public + DSSTF *Ignores other off-budget items and trust funds

Double Counting?: 

Double Counting? Unified surplus results from SS surplus SS surplus increases SSTF anyway Transfer 62% of projected unified surplus to Social Security DSSTF = SS Surplus + Transfer DGross Debt = Unified Deficit + Transfer Unified deficit and debt held by public unchanged

Illustration of Transfer to Social Security: 

Illustration of Transfer to Social Security

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