Lecture 22 Government Debt Flashcards
amount of federal debt held by the public per person
$79k
amount of federal debt held by the public per family of four
$320k
government debt
the amount of money the federal government has borrowed to cover the outstanding balance of expenses incurred over time
if the government experiences reoccurring deficits, the government debt grows over time
when does a budget deficit happen
when government spending exceeds revenue (tax receipts)
how does the government pay for budget deficits
the government borrows by selling securities such as treasury bonds
national debt
the accumulation of government borrowing along with the associated interest payments owed to the investors who purchased these securities
economic growth and debt
economic growth increases the available resources, making it possible to sustain higher debt (more growth = more debt)
debt/GDP ratio
growing absolute debt isn’t a concern because absolute debt is just a result of growth
a growing debt/GDP ratio can be a concern because a growing share of output must be devoted to paying interest
intertemporal budget balancing
government’s budget deficits today must be offset by future budget surpluses
a flow budget constraint holds in each period
intertemporal budget constraint
holds when we consolidate the flow budget constraints over all future periods
today’s debt level B1 linked to future primary surpluses T2-G2
the government’s budget must balance… but it balances in a present discounted value sense, not period by period
government must have future surpluses to pay off deficits today
flow budget constraint equation
Gt + Trt + itBt = Tt + ΔBt+1
Gt = government purchases
Trt = transfer payments (social security, unemployment insurance…)
itBt = interest payments on existing debt Bt
Tt = taxes
ΔBt+1 = Bt+1 - Bt (new borrowing)
primary deficit
spending - taxes
Gt - Tt
total deficit
primary deficit plus interest payments
itBt + Gt - Tt
when does government debt increase
Bt+1 > Bt
total deficit > 0
when does government debt shrink
Bt+1 < Bt
total deficit < 0
intertemporal budget constraint equation
(1 + i)B1 = T1 - G1 + (T2-G2)/(1+i)
value of debt = present discount value of primary surpluses
congressional budget office (CBO)
bipartisan, federal agency that provides budget and economic information to congress
CBO projections
population aging and rising health care costs boost primary deficits
net interest outlays double as a percentage of GDP over the projection period
biggest items of future government outlays
1) social security/medicare (because of population aging: the number of participants in social security and medicare is projected to grow faster than the overall population)
2) interest payments
what does the government spend money on?
1) mandatory spending
2) discretionary spending
mandatory spending
mandated by existing laws (medicare, social security, medicaid…)
discretionary spending
formally approved by congress and president (typically, 50% for national defense and the rest to other programs: transportation, education, housing, social services)
rise in health care spending
costs: expensive medical technologies are raising expenditures, waste and fraud in the health system
rising demand for healthcare services
BUT: health spending is growing in virtually all rich countries
rising demand for healthcare services
consumption is subject to diminishing returns, adding additional months of life is not subject to diminishing returns
more time to enjoy high incomes is increasingly valuable, thus health spending will rise by more than consumption
it might be optimal for health care expenditures (as a fraction of GDP!) to rise as economies get richer
