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The Government Budget: Prospects and Implications Andrew B. Abel March 13, 2000.

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Presentation on theme: "The Government Budget: Prospects and Implications Andrew B. Abel March 13, 2000."— Presentation transcript:

1 The Government Budget: Prospects and Implications Andrew B. Abel March 13, 2000

2 The Government Budget: Prospects and Implications, Professor Andrew Abel2 National Saving and Wealth Income Statement Concepts Output: Y = C + I + G + NX National Saving: S = Y - C - G = I + NX Balance Sheet Concept National Wealth = domestic capital stock + net foreign assets

3 The Government Budget: Prospects and Implications, Professor Andrew Abel3 Link Between Balance Sheet and Income Statement National Saving = Growth of National Wealth S = I + NX I = growth of domestic capital stock NX = growth of net foreign assets

4 The Government Budget: Prospects and Implications, Professor Andrew Abel4 Capital Gains and Saving Capital gain for an individual Increases current income If not spent: Increases current saving Increases wealth at end of year Capital gain can increase current and/or future consumption of individual

5 The Government Budget: Prospects and Implications, Professor Andrew Abel5 Capital Gain in Closed Economy: National Perspective S = I If add capital gain to national output, Y S would increase Would have to add capital gain to I But I is intended to measure gross capital formation, which affects capacity to produce and consume in future

6 The Government Budget: Prospects and Implications, Professor Andrew Abel6 Source of Capital Gains Increase in dividend, current or future Reflects increase in current or future output Decrease in r Does not reflect increased current or future output Bubble Unrelated to current or future output

7 The Government Budget: Prospects and Implications, Professor Andrew Abel7 Capital Gains: Individual vs. National Increase ability of individual to consume May not affect ability of nation to consume Example: Stock market bubble Increases wealth of individual owners Does not increase ability of nation as a whole to consume

8 The Government Budget: Prospects and Implications, Professor Andrew Abel8 U.S. National Saving, 1999-III Source: Survey of Current Business, February 2000.

9 The Government Budget: Prospects and Implications, Professor Andrew Abel9 Gross Government Saving 1999-III Source: Survey of Current Business, February 2000.

10 The Government Budget: Prospects and Implications, Professor Andrew Abel10 Discretionary Outlays under Alternative Versions of Baseline Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 4-3, p. 80.

11 The Government Budget: Prospects and Implications, Professor Andrew Abel11 Budget Outlook under Current Policies Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 1, p. xiv.

12 The Government Budget: Prospects and Implications, Professor Andrew Abel12 International Comparison of Fiscal Balances: I Percent of GDP. Source: World Economic Outlook, International Monetary Fund, October 1999, Table 14, p. 188.

13 The Government Budget: Prospects and Implications, Professor Andrew Abel13 International Comparison of Fiscal Balances: II Percent of GDP. Source: World Economic Outlook, International Monetary Fund, October 1999, Table 15, p. 190.

14 The Government Budget: Prospects and Implications, Professor Andrew Abel14 Gross Government Debt in Europe (percent of GDP) Source: World Economic Outlook, International Monetary Fund, May 1997, Table 5. P. 27.

15 The Government Budget: Prospects and Implications, Professor Andrew Abel15 Revenues as a Share of GDP Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 3-2, p. 51.

16 The Government Budget: Prospects and Implications, Professor Andrew Abel16 Revenues by Source Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 3-3, p. 53

17 The Government Budget: Prospects and Implications, Professor Andrew Abel17 Outlays Discretionary spending Annual appropriation Defense, education, transportation,... Mandatory spending (Entitlements) Eligibility rules and benefit formulas Offsetting receipts e.g., drilling leases for Outer Continental Shelf Net interest

18 The Government Budget: Prospects and Implications, Professor Andrew Abel18 Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table E-9, p. 143. Discretionary Entitlements and other mandatory Net interest Offsetting receipts

19 The Government Budget: Prospects and Implications, Professor Andrew Abel19 The Peace Dividend Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 4-3, p. 75.

20 The Government Budget: Prospects and Implications, Professor Andrew Abel20 Nondefense Discretionary Spending Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 4-2, p. 78.

21 The Government Budget: Prospects and Implications, Professor Andrew Abel21 Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 2, p. xvi.

22 The Government Budget: Prospects and Implications, Professor Andrew Abel22 Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 2, p. xvi.

23 The Government Budget: Prospects and Implications, Professor Andrew Abel23 Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 3, p. xvii.

24 The Government Budget: Prospects and Implications, Professor Andrew Abel24 Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 4, p. xviii.

25 The Government Budget: Prospects and Implications, Professor Andrew Abel25 Alternative Measure of Fiscal Balance Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table E-1, p. 135. Standardized budget excludes deposit insurance, receipts from auctions of electromagnetic spectrum, timing adjustments, and constributions from allied nations for Operation Desert Storm. Actual Standardized

26 The Government Budget: Prospects and Implications, Professor Andrew Abel26 Projections of Federal Debt: I Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-5, p. 20.

27 The Government Budget: Prospects and Implications, Professor Andrew Abel27 Projections of Federal Debt: II Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-5, p. 20.

28 The Government Budget: Prospects and Implications, Professor Andrew Abel28 Projections of Federal Debt: III Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-5, p. 20.

29 The Government Budget: Prospects and Implications, Professor Andrew Abel29 Trust Fund Surpluses Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-6, p. 23.

30 The Government Budget: Prospects and Implications, Professor Andrew Abel30 Burden of the Debt (end of FY99, billions of dollars) Debt ceiling raised to $5500 billion in March 1996 raised to $5950 billion in Balanced Budget Act of 1997

31 The Government Budget: Prospects and Implications, Professor Andrew Abel31 Two Views of Burden of Debt “We Owe it to Ourselves” ==> No Burden $1973 billion held by gov’t is no burden $3633 billion held by public is owed to public but foreigners own some of this debt Burden, even if U.S. citizens owned all of debt Crowds out capital stock Reduces long-run wages and output per person

32 The Government Budget: Prospects and Implications, Professor Andrew Abel32 Federal Interest Outlays Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 4-10, p. 94.

33 The Government Budget: Prospects and Implications, Professor Andrew Abel33 Gross Debt/GDP Net Debt/GDP

34 The Government Budget: Prospects and Implications, Professor Andrew Abel34 Changes in Debt-GDP Ratio Debt-GDP Ratio: Growth of numerator: deficit Primary deficit + net interest Growth of denominator: nominal GDP growth

35 The Government Budget: Prospects and Implications, Professor Andrew Abel35 Factors Causing Debt-GDP Ratio to Rise Large Primary Deficits (deficit minus interest) Wars Great Depression 1980s and first half of 1990s High (Real) Interest Rates Low GDP growth Great Depression

36 The Government Budget: Prospects and Implications, Professor Andrew Abel36 Effect on Deficit of 1 Percentage Point Reduction in Measured CPI (fiscal years, billions of dollars) Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1998-2007, January 1997, p. 41.

37 The Government Budget: Prospects and Implications, Professor Andrew Abel37 Long-Run Deficit Projections (Calendar year, percentage of GDP) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-5, p. 43.

38 The Government Budget: Prospects and Implications, Professor Andrew Abel38 Long-Run Debt Projections (Debt held by public, calendar year, percentage of GDP) Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 2-2, p. 44.

39 The Government Budget: Prospects and Implications, Professor Andrew Abel39 Social Security: Demographic Time Bomb Source: 1999 OASDI Trustees Report, Table II.F.19

40 The Government Budget: Prospects and Implications, Professor Andrew Abel40 OASDI Trust Fund Ratio Source: 1999 OASDI Trustees Report, Table II.F.20

41 The Government Budget: Prospects and Implications, Professor Andrew Abel41 Possible Solutions Increase Contributions by Workers Increase retirement age Reduce Benefits Paid to Retirees Increase retirement age Tax Social Security benefits Earn Higher Return on Assets in Trust Fund Invest in equities Privatize Social Security Individuals control allocation of assets Transitional problems


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