Week 10: Fiscal Challenges in the Long-Run Flashcards
Government Budget Constraint
Budget Balance Equation
tax revenues - spending
Budget Surplus
occurs when government income exceeds expenditures
When does a budget deficit occur?
occurs when government expenditures exceed income
Balanced Budget
total government spending = government tax receipts
Gov Spending and Revenue Over Time
WW2, US and Europe
WW1: taxes and spending increased sharply
US: after war spending and revenue were stable fraction of GDP, budget deficits emerged 1970s
EU: welfare state building increased deficits overtime
Debt-GDP Ratio Definition
measures gross debt of the general government as a % of GDP
Debt-GDP Ratio Equation
When considering the consequence of deficits and debts, what must the government consider?
- Economic growth
- Possibility of high inflation
- Intergenerational equity
- Extent to which deficits crowd out investments
What limits the amount the government can borrow?
- Amount it can credibly be expected to pay back
- Partially how large the economies GDP to debt ratio is
What happens if the debt-ratio becomes too high?
Lenders worry about the gov to repay and investors demand higher interest rates
What happens if lenders stop lending to the government?
Gov may print more money to satisfy budget which generates inflation - quantitative easing
Government Debt
financial liabilities of the government sector
Net Gov Debt
comprises all financial liabilities minus all financial assets of the general government
Default
the failure to make required interest or principal repayments on a debt
Generational Accounting
the method of measuring the fiscal burdens facing current and future generations
Example of generational accounting (WW2)
The fighting generation made large sacrifices, future generations benefited from the victory but paid for the war
National Income Identity Definition
amount received as national income is identical to the amount spent as national expenditure, which is also identical to what is produced as national output
National Income Identity
Y = C + I + G + (EX-IM )
Y = output C = consumption I = investment G = Government spending EX = exports IM = imports
What can investment be financed through? (3)
- Savings from private sector
- Gov saving
- Saving by foreigners
Disposable Income
amount of money available for spending or saving after paying direct taxes
Crowding Out
economic theory arguing that rising public sector spending drives down or even eliminates private sector spending
What does Ricardian Equivalence Imply?
Holding PV of gov spending constant, the timing of taxes does not affect consumption
Budget deficits need to crowd out investment
What is the Debt-GDP ratio used for?
Key indicator for the sustainability of gov finance
