16.1 Facts and Definitions

Question 1

What is “The government’s budget constraint”?

Answer 1

There is a simple relationship between the government’s expenditures, its tax revenues, and its borrowing. This relationship is summarized in what economists call the government’s budget constraint.

Question 2

What is the difference between how individuals and the government gains “Income”?

Answer 2

The difference between individuals and governments, however, is that governments typically do not earn income by selling products or labour services; instead, their income is generated by levying taxes.

Question 3

Equation for govenment expenditure.

Answer 3

Question 4

We divide government expenditure into two categories.

Answer 4

The first is purchases of goods and services, G.

The second is the interest payments on the outstanding stock of debt; this is referred to as debt-service payments and is denoted i * D, where i is the interest rate and D is the stock of government debt (which has accumulated over time from the government’s past borrowing).

Question 5

A third category of government spending is…

Answer 5

A third category of government spending is transfers to individuals and firms (such as employment-insurance benefits, public pensions, and industrial subsidies) but, as we did in earlier chapters, we include transfers as part of T, which is the government’s net tax revenue (tax revenue minus transfers).

Question 6

What are debt-service payments?

Answer 6

Debt-service payments

Payments that represent the interest owed on a current stock of debt.

Question 7

Formula for the Government Budget Constraint

Answer 7

Question 8

What is a Budget Deficit?

Answer 8

Budget deficit

Any shortfall of current revenue below current expenditure.

Question 9

What is something that increases the stock of government debt?

Answer 9

Since the government borrows by issuing bonds and selling them to lenders, borrowing by the government increases the stock of government debt.

Question 10

Definition of Government debt

Answer 10

Government debt

The outstanding stock of financial liabilities for the government, equal to the accumulation of past budget deficits.

Question 11

Equation for Budget deficit

Answer 11

Since D is the outstanding stock of government debt, is the change in the stock of debt during the course of the year. The budget deficit can therefore be written as

Question 12

What is the governments annual budget deficit a compilation of?

Answer 12

The government’s annual budget deficit is the excess of expenditure over tax revenues in a given year. It is also equal to the change in the stock of government debt during the year.

Question 13

Two points about budget deficits that we can see using simple arithmetic.

Answer 13

A change in the size of the budget deficit requires a change in expenditures relative to tax revenues.

Since the budget deficit is equal to the amount of new government borrowing, the stock of government debt will rise whenever the budget deficit is positive.

Question 14

What is a Budget surplus?

Answer 14

Budget surplus

Any excess of current revenue over current expenditure.

Question 15

What is the effect of a deficit and surplus on stock of government debt?

Answer 15

A budget deficit increases the stock of government debt; a budget surplus reduces it.

Question 16

Why is the debt-service component of total expenditures beyon the immediate control of the government?

Answer 16

Since at any point in time the outstanding stock of government debt—determined by past government borrowing—cannot be influenced by current government policy, the debt-service component of total expenditures is beyond the immediate control of the government.

Question 17

What componenets of the government’s budget are in the immediate control of government?

Answer 17

The other components of the government’s budget (G and T) are determined by the current set of spending programs and tax policies, all of which can be adjusted if the government chooses to do so.

Question 18

What is the Primary Budget Deficit?

Answer 18

The difference between the government’s overall budget deficit and its debt-service payments.

To capture the part of the budget deficit that is attributable to current spending and tax policies, we can compute the primary budget deficit, defined to be the difference between government purchases and net tax revenues:

Question 19

What does the primary budget deficit show?

Answer 19

The government’s primary budget deficit shows the extent to which current tax revenues are sufficient to finance expenditure on current government programs.

Question 20

Why is there often a large difference between the governments overall budget deficit and its primary budget deficit?

Answer 20

Because of the need to make debt-service payments, there are often large differences between the government’s overall budget deficit (or surplus) and its primary budget deficit (or surplus).

Question 21

What does the primary budget suprplus or deficit show and what is it equal to?

Answer 21

The primary budget surplus or deficit shows the extent to which current tax revenues can cover the government’s current program spending; it is equal to the overall budget deficit minus debt-service payments.

Question 22

What do economits focus on government d+d in relation to?

Answer 22

In a growing economy, many macroeconomic variables, such as the levels of government expenditure and tax revenue, also tend to grow. As a result, rather than looking at the absolute size of the government deficit or debt, economists focus on government debt and deficits in relation to the overall size of the economy.

Question 23

What was the federal budget like between 1975 and 1997?

Answer 23

The federal budget was in deficit every year between 1975 and 1997

Question 24

What happened to the governmetns debt-to-GDP ratio after the Second World War?

Answer 24

The federal government’s debt-to-GDP ratio fell dramatically after the Second World War and continued falling until 1975.

Question 25

What is important to consider when examining the size and effects of budget deficits or surpluses?

Answer 25

When examining the size and effects of budget deficits or surpluses, it is important to consider all levels of government—federal, provincial, territorial, and municipal.

Question 26

If we want to know how much of a​ government’s budget deficit is attributable to current program spending and tax​ policies, we compute the
primary budget deficit.

What does this measure tell us the difference between?

Answer 26

This measure tells us the difference between the​ government’s overall budget deficit and its debt dash service payments
.