20-2 How Big is the Deficit? Deficit Surplus On-budget deficit Off-budget deficit
20-3 How Big is the Deficit?
20-4 How Big is the Debt? National (Public) Debt Stocks v Flows
20-5 How Big is the Debt?
20-6 Interpreting Deficit, Surplus, and Debt Numbers Government Debt held by the Federal Reserve Bank State and Local Government Effects of Inflation inflation tax Capital versus Current Accounting Tangible Assets Implicit Obligations Summing Up
20-7 The Burden of the Debt Statutory versus Economic Incidence Lerner’s View Internal Debt External Debt
20-8 Overlapping Generations Model The Period YoungMiddle-AgedOld (1) Income$12,000 12,000 (2) Government Borrowing-6,000 (3) Government- provided consumption4,000 The Year 2027 YoungMiddle-AgedOld (4) Government raises taxes to pay back debt -4,000 (5) Government pays back debt+6,000
20-9 Generational Accounting Computation of Net Tax PV of transfers received – PV of taxes paid
20-10 Neoclassical Model Crowding Out Hypothesis Empirical testing of the hypothesis
20-11 The Ricardian Model Intergenerational transfers Form of Finance is irrelevant Empirical evidence
20-12 To Tax or to Borrow Benefits-Received Principle Intergenerational Equity Efficiency Considerations Efficiency Considerations χ = ½εLt 2 χ = ½εLt 2 Macroeconomic Considerations Functional finance Moral and Political Considerations
20-13 Present Value of Tax Payments Under Alternative Taxing/Borrowing Decisions PolicyYear 1 Year 2 All Future Years 10% interest rate Spend an additional $100 in year Financing Options Balanced budget: raise 100 in taxes in year Deficit Finance I: borrow 100 in year 1 and pay back debt plus interest in year 2 by raising taxes Deficit Finance II: borrow 100 in year 1 and pay interest on debt in all subsequent years always rolling over debt principle
20-14 To Tax or To Borrow Tax rate Excess Burden t2t χ2χ2 χ1χ1