Week 11 Flashcards
How much can the government borrow (safely, w/o running the risk that ppl don’t want to lend $$ / lend at very high interest rates OR worse, gov can’t repay its debts)?
We must consider:
1. Economic growth
2. Possibility of high inflation or default
^also, solution to default is usually an international institution lending $$ to gov at a special interest rate, eg. IMF
{no flashcards for these 2 points b/c I remember}
- Intergenerational equity
- The extent to which deficits crowd out investment
Intergenerational equity
Generational accounting
When gov borrows many years of deficit accumulating higher debt-GDP ratio, the beneficiaries of borrowing may not be the same ppl who repay the debt.
Generational accounting calculates the extent to which CURRENT POLICIES pass on tax burdens to FUTURE generations if we keep current policies as they stand now.
- Current policies are intergenerationally unequal.
- point is that High and rising debt-GDP ratios imply the burden is shifted to future generations. Future generations have to pay HIGHER TAX (to clear gov intertemporal budget constraint).
3 ways investment in a country is financed from
The extent to which deficits CROWD OUT investment
National income identity implies that Total savings in country = Total investment in country, which can be financed from…
- Private savings (Y - T - C)
- Govt savings (T - G)
- Foreign savings
Crowding out - budget deficits absorb some of the savings & reduce investment (but researchers don’t know exactly how impact investment)
^If gov saving is -ve, we are using private saving to finance that.
Ricardian equivalence implies:
If NPV of gov spending is constant, timing of taxes doesn’t affect consumption. Given current fiscal policies it won’t affect private savings.
∴ We do not expect budget deficits to crowd out investment.
3 reasons for unsustainable current policies
- Mostly due to AGEING population
- Countries need to raise tax revenues to balance the budget
- Increased generosity of pension programs
- pay-as-you-go vs fully funded pension systems - Rise in share of pop. receiving pension benefits for longer
- Rise in healthcare expenditures (MAIN issue)
- due to innovation, more $$ new tech, machines, drugs…
- concentrated on older pop., at end of life
> > Social security/pension benefits + HEALTHCARE are becoming an increasingly large share of GDP throughout the world
Demographic trends & prediction based on graphs shown
- Share of population aged >80 and >65 are expected to increase rapidly over the next 30 years (until 2050)
- common problem for developed countries, eg. South Korea, but now soon for developing countries too - Share of working-age population (15-64y/o) is expected to decrease by 2050
- Age dependency ratio expected to increase over time for most economies, incl. developed
- more non-working age ppl absorbing resources produced by others w/o contributing
3 examples of policy changes by countries to reduce spending for pensions & healthcare
- RAISE TAXES!
- Increase retirement age so that ppl can still contribute to economy
- ppl might want to work longer, increase no. of ppl who pay TAXES and finance pension systems - Reduce pension funds (less effective)
- Increase tax/social contributions by workers
- Companies offer private health insurance, added to the provision. Similar to how several countries modified their pension system to include some private pension funds for workers.
- becoming more common in developed countries, but may have to pay partially on your own - Govs create Mandated savings accounts for {individual} healthcare spending
- save for your own healthcare when needed, aka old age
Why can economic growth be thought as a problem for rapidly growing expenditures on healthcare? Although economic growth helps to solve budgetary problems…
As ppl grow richer over time, desire to spend $$ on health = purchasing longer and better lives increases
- b/c consumption is subject to diminishing returns
- so better to increase the time for enjoying high level of consumption
