1. Macroeconomics For Social Negotiators

2. Public Deficit and Debt Gustavo Rinaldi Ph.D.

3. Government Surplus or Deficit
Government Surplus or Deficit General Government Net Lending (+) or Net Borrowing (-)
Deficitt = i Bt Gt – Tt

4. Budget Deficit . i = interest rate
Bt-1 = debt on december 31st of the ______previous year

5. General government net lending/borrowing

6. General government net lending/borrowing

7. 1 + i = 1 + r 1 + p Real interest rate p Is the inflation rate
i Is the nominal interest rate

8. Inflation Adjusted Budget Deficit
. r = real interest rate
Bt-1 = debt inherited from the previous year

9. Inflation Adjusted Budget Deficit
Deficit = r Bt Gt – Tt
Deficitt = interests primary deficit

10. interests on the debt r Bt-1 real interest payments
i Bt nominal expenditure

11. i Bt-1 /GDP

13. Primary Budget Deficit
Gt – Tt
Gt it does not include monetary transfers (pensions, benefits, subsidies to firms, etc.).
T includes taxes and transfers (T = net taxes)

16. General government primary net lending/borrowing

17. General government primary net lending/borrowing

18. Sources of government funding
Taxes
Sales of public assets
Dividends from state owned firms
Borrowing
Printing money

19. Sources of government funding
Taxes
Sales of public assets
Dividends from state owned firms
Borrowing
Printing money

20. Government sells bonds
To the CB : Monetary Finance
To private: Debt Creation
We assume that only creates debt.

21. Deficits create and increase Debts
Bt - Bt-1 = r Bt Gt – Tt

22. Deficit creates and increases Debt
Bt - Bt-1 = r Bt Gt – Tt
Bt = r Bt-1 + Bt Gt – Tt
Bt = (1+r) Bt Gt – Tt

23. In general B1 = (1+r) B0 + G1 – T1 If B1 = B0 B0 = (1+r) B0 + G1 – T1
Stabilization
In general
B1 = (1+r) B G1 – T1
If B1 = B0
B0 = (1+r) B G1 – T1

24. interests = primary surplus
Stabilization
in this case
B0 = B0+B0r G1 – T1
0 = B0r G1 – T1
B0r = T1 – G1
interests = primary surplus

25. Which resources we use to serve the il debt?
GDP mainly

26. B t = (1+r) Bt-1 + Gt – Tt_ Yt Yt Yt
Debt / GDP
B t = (1+r) Bt Gt – Tt_
Yt Yt Yt

27. (gross) Debt / GDP

29. B t = (1+r) Bt-1 + Gt – Tt_ Yt Yt Yt
Debt / GDP
B t = (1+r) Bt Gt – Tt_
Yt Yt Yt
Multiply by Yt-1/ Yt-1 = 1

30. B t = Yt-1(1+r) Bt-1 + Gt – Tt_ Yt Yt Yt-1 Yt
Debt / GDP
B t = Yt-1(1+r) Bt Gt – Tt_
Yt Yt Yt Yt

31. Debt / GDP
Yt-1 =
Yt gy
gy = GDP growt rate

32. B t = (1+r) Bt-1 + Gt – Tt_ Yt (1+gy) Yt-1 Yt
Debt / GDP
B t = (1+r) Bt Gt – Tt_
Yt (1+gy) Yt Yt

33. B t = (1+i) Bt-1 + Gt – Tt_ Yt (1+) (1+gy)Yt-1 Yt
Debt / GDP
B t = (1+i) Bt Gt – Tt_
Yt (1+) (1+gy)Yt Yt

34. B t = (1+r-gy) Bt-1 + Gt – Tt_ Yt Yt-1 Yt
Debt / GDP
B t = (1+r-gy) Bt Gt – Tt_
Yt Yt Yt
approximation

35. B t - Bt-1 = (r-gy) Bt-1 + Gt – Tt_ Yt Yt-1 Yt-1 Yt
Debt / GDP =
B t - Bt = (r-gy) Bt Gt – Tt_
Yt Yt Yt Yt

36. Growth adjusted real interests on debt
(r-gy) Bt-1 = Growth adjusted real interests
Yt on debt
r and g have opposite effects on Bt/Yt

37. Debt / GDP If g > r with G=T Debt/GDP decrease
Se g < r with G=T Debt/GDP increases
GDP growth is a way to reduce Debt/GDP

38. Debt/GDP in Italy

39. Debt/GDP in Italy 46-14

40. Primary Surplus

41. Public Finance Strategies
Balanced Budget.
Balanced Budget over the Business Cycle.
Surplus in growth years, deficit in recessions.
Balance in growth years, deficit in recessions.
EU Fiscal Compact
Sales of Public Assets (privatizations)
Monetary Finance.
Financial Repression
(capital controls and portfolio constraints)
Nominal GDP growth > Debt Growth (national money).

42. Fiscal Compact Maximum deficit 0,5% of GDP Every year:
Bt/Yt – Bt-1/Yt-1 = ( Bt-1/Yt-1 – 60 ) / 20

43. Recommended Reading