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The Government Budget: Prospects and Implications

The Government Budget: Prospects and Implications. Andrew B. Abel March 13, 2000. National Saving and Wealth. Income Statement Concepts Output: Y = C + I + G + NX National Saving: S = Y - C - G = I + NX Balance Sheet Concept

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The Government Budget: Prospects and Implications

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

  2. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  3. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  4. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  5. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  6. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  7. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

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

  9. Gross Government Saving1999-III Source: Survey of Current Business, February 2000. The Government Budget: Prospects and Implications, Professor Andrew Abel

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

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

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

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

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

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

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

  17. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  18. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

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

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

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

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

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

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

  25. 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. Standardized Actual The Government Budget: Prospects and Implications, Professor Andrew Abel

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

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

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

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

  30. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  31. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

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

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

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

  35. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

  36. 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. The Government Budget: Prospects and Implications, Professor Andrew Abel

  37. 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. The Government Budget: Prospects and Implications, Professor Andrew Abel

  38. 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. The Government Budget: Prospects and Implications, Professor Andrew Abel

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

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

  41. 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 The Government Budget: Prospects and Implications, Professor Andrew Abel

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