Budget Analysis and Deficit Financing Flashcards
debt
the amount borrowed by government through bonds from individuals, firms or foreigners. debt is a stock
budget balance
government’s revenues minus government’s spending minus interest payments on debt in a given year
primary deficit
spending - revenue
aus government gross and net debt as % of GDP
34.9%
21.6%
government debt sustainability
requires the debt/gdp ratio to be stable or decreasing
intergenerational effects of govt debt in a closed economy
govt borrows from private sector
govt debt increase private wealth and decreases public wealth
no effect on national wealth
changes the distribution of wealth
intergenerational effects of govt debt in an open economy
govt debt can also be borrowed from abroad
in this case, govt debt is indeed making future generations poorer
entitlement spending
mandatory funds for programs for which funding levels are automatically set by the number of eligible recipients (medicare, NDIS, social security)
discretionary spending
optional spending set by appropriation levels each year
new-keynesian theory
more government spending or tax cuts stimulates the economy in the short-run
short run stabilisation
govt can use taxes and spending policies to smooth the peaks and troughs of the business cycle
automatic stabilisation
policies that automatically alter taxes or spending in response to economic fluctuations to offset changes in household consumption levels
discretionary stabilisation
policy actions taken by the government in response to business cycle
static scoring
a method used by budget modelers that assumes that government policy changes only the distribution of toal resources, not the amount of total resources
dynamic scoring
a method used by budget modelers that attempts to model the effect of government policy on both the distribution of total resources and the amount of total resources
intertemporal budget constraint
relates the present discounted value of the government’s obligations to the present discounted value of its revenues:
PDV of Tax Payments = PDV of all future govt spending + current govt debt
long run fiscal imbalance
the gap between PDV of all future government spending + current govt debt and PDV of tax payments
long run effects of govt debt
with more govt debt, if private savings do not change, less funds available for investment: investment decreases
two mitigating factors to long run effects of govt debt
in an open economy, investment or govt debt can be funded with foreign savings
if individuals are forward looking, they understand that higher debt implies high taxes later on and hence they save more to be able to pay higher taxes later on
background: savings and economic growth
the earliest economic growth models emphasised a central role for savings as an engine of growht, and this insight remains important for growth economics tofay
more capital more growth
as there is more capital in an economy, each worker is more productive and total social product rises. a larger capital stock means more total output for any level of labour supply. thus, the size of the capital stock might be a primary driver of growth
interest rate
the rate of return in year t+1 on investments made in year t
supply and demand for capital
supply of savings (from households) depends positively on r (higher r means bigger returns to savings)
demand for investment (from firms) depends negatively on r (firms invest only if return on investment is at least equal to r)
in a competitive market, the equilibrium amount of investment is determined by the intersection of these demand and supply curves S(r) = D(r)
international capital markets
with intl capital markets, there is a worlwide interest rate so govt debt has no impact on r and K
