Government Budget Deficit

12 Key excerpts on "Government Budget Deficit"

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  The Reform of Macroeconomic Policy

  From Stagflation to Low or Zero Inflation

  • J. Perkins(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  8 Of Budget Deficits and Macroeconomic Policy (1996) * The amount of attention given to reducing, or at least holding down, the government’s budget deficit (on some definition or other) in recent years has been at the expense of a rational approach to macroeconomic policy. This chapter outlines the reasons why that approach may have damaging macroeconomic effects. It draws attention to ways in which the costs and benefits of a reduction or increase in government bor- rowing (‘the budget deficit’) should be considered only in the context of the macroeconomic (and other) effects of the particular combina- tions of government outlays and revenue with which any change in the budget deficit is brought about. Simulations for a number of countries and areas are drawn upon to illustrate that different combinations of outlays and revenue items can have widely varying effects on the various macroeconomic objectives for the same effect on the budget deficit. These illustrate the basic point that it is not helpful to try to couch macroeconomic policy in terms of the effects that it has on the budget deficit, on whatever definition a government may be choosing to apply. Moreover, defens- ible definitions are so many that the deficit can be made to show almost any figure by an appropriate choice of definition. (See Perkins, 1995; Robinson, 1996.) The possible benefits and costs of a reduction in government borrow- ing are first considered – as distinct from those resulting from the changes in outlays and revenues with which the change in borrowing 128 * An earlier version of this chapter appeared in D.T. Nguyen (ed.), Queensland, Australia, and the Asia-Pacific Economy, Economic Society (Queensland) (Brisbane, 1996). The ideas in this chapter are considered in greater detail in Perkins (1997).

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  Tracking America's Economy

  • Norman Frumkin(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  This compares with the estimated cumulated avoided, evaded, or unpaid taxes by individuals of $132 billion, including $70 billion in offshore accounts, and $46 billion by corporations. 5 State and Local Governments The total of state and local budgets has typically been in surplus, but it fell into its largest deficit positions in 2001 and 2002 (Table 6.3). This was a shift from a budget surplus of 0.2 percent of the GDP in 2000, to a deficit of 0.3 percent of the GDP in 2001, to a deficit of 0.5 percent of the GDP in 2002. I estimate the state and local budget deficit will rise to 0.6 percent of the GDP in 2003. State and local constitutions typically require balanced budgets, so these governments are obligated to limit deficits, when they occur, to short periods. Thus, there have been strong pressures in 2002 and 2003 to cut state and local spending and/or raise taxes. It appears that if a federal law is passed in the mid-2000s creating uniform national standards for electronic on-line state sales taxes that would authorize states to collect these taxes, it would be too late to alleviate the likely deficits in the mid-2000s. In assessing prospects for future government budget surpluses or deficits, the analyst should monitor both the expenditure and receipts components of the budgets. These budget data should be considered in the context of the overall economy, as a percentage of the GDP, to give a historical perspective with previous years, and also to put the severity of a deficit into perspective. FISCAL POLICY INITIATIVES TO STIMULATE ECONOMIC GROWTH The overall effect of government budget expenditures, revenues, and the surplus/ deficit position was covered in chapter 2, “Framework for Macroeconomic Analysis and Policies.” Using that framework as a starting point, many studies have been made of the impact on economic growth of changes in federal government spending and taxes that were made over the years. 6 But the conclusions of the studies vary widely

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  Country Analysis

  Understanding Economic and Political Performance

  • David M. Currie(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  budget deficit ratio measures the size of the government surplus or deficit expressed as a percentage of the country’s GDP. In the US, the ratio for 2000 was:

  This positive result indicates a budgetary surplus; a budgetary deficit would lead to a negative result.

  The budget deficit ratio reflects the government’s ability to spend within the tax revenues it generates, which global investors interpret as sound fiscal policy. Just like the government spending ratio, the budget deficit ratio may be for only the central government or for all levels of government added together. The ratio above was calculated for only the central government. As you see in Table 5.10 , the US experienced an improving ratio throughout the last five years of the Clinton administration, which ended in 2000, but since then the ratio has become increasingly negative under the Bush administration.

  Similar data are available from the OECD, but for all levels of government – federal, state, and local in the US. Comparing the deficit as percent of GDP in Table 5.11 to deficit as percent of GDP in Table 5.10 reveals that during 1995, 1996, and 1997, when the Federal Government was running budgetary deficits, other levels of Government were running budgetary surpluses so that the ratio for general Government was positive. The same is true in 2003 through 2005: the combined Government deficits as percent of GDP are less negative than the figures for the Federal Government only, indicating that state and local governments ran budgetary surpluses.

  Because government’s total impact on the economy is measured by the combined taxing and spending of all levels of government, the broader indicator of general government’s surplus or deficit is more appropriate. However, it frequently is difficult to obtain timely information about all levels of government, and it certainly is difficult to evaluate decision making in all states and municipalities. For that reason, more attention is focused on behavior of decision makers at the central government level, so measures of the sort in Table 5.10

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  Public Finance in Theory and Practice Second edition

  • Holley H. Ulbrich, Holley Ulbrich(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  Thinking globally. Compare the composition of spending in the US federal budget to the federal budget in Canada, which is similar to the United States in income level and federal structure. How does the spending mix differ? What factors might account for that difference? Passage contains an image 9 Borrowing, Debt Service, and Capital Financing Introduction

  For the most part, courses in public sector economics leave macroeconomic issues to be addressed elsewhere. Balanced budgets, deficits, and debt are usually addressed in courses in macroeconomics as a matter of fiscal policy to influence the level of output and employment. But borrowing, debt service, and capital financing also have important microeconomic implications for the budget process, the choice of what expenditures to fund, and whether to make changes in the tax system in order to balance the budget. Those are the aspects of borrowing, debt and deficits addressed in this chapter.

  The deficit is the gap between spending and revenue in a particular year (a surplus if revenue exceeds spending). The debt is the cumulative result of past surpluses and deficits, the stock of government IOUs that must eventually be repaid and that generate a debt service obligation in the current year’s budget. Debt service refers to payments of interest and repayments of principal as an operating expense. Some debt service is part of the regular budget; other debt service is off-budget in special funds, including enterprise funds (like water and sewage) or agency funds (like public colleges and universities).

  Microeconomic and macroeconomic concerns about budget deficits cannot be separated from each other, because the state of the economy affects both revenue and expenditures, and changes in the level of revenue and expenditures (especially by the central government) in turn affect the economy. When times are good, higher income and employment generate more income tax and payroll tax revenue, and higher consumer spending generates more sales or value-added tax revenue. Even the property tax is not immune to the effects of the economy, as housing prices tend to reflect changes underlying economic conditions, although property tax revenue is more stable than income and sales tax revenue.

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  The Economics of Adjustment and Growth

  Second Edition

  • Pierre-Richard Agénor, Pierre-Richard Agénor(Authors)
  • 2004(Publication Date)
  • Harvard University Press

    (Publisher)

  The very fact that the government chooses to assume explicitly these liabilities may lead to changes in private sector behavior that may make the realization of the events against which liabilities are created more likely. Moreover, increasing fiscal transparency may encounter strong political resistance. Deficits, Debt, and the Current Account 83 3.2 The Government Budget Constraint In general, the budget constraint of the government can be written as G ( T T + T N ) + iB 1 + i EB g 1 = L g + B + E B g , (2) where • G is public spending on goods and services (including current and capital expenditure); • T T is tax revenue (net of transfer payments) and T N nontax revenue, • B is the end-of-period stock of domestic public debt , which bears interest at the market-determined rate i ; • B g is the end-of-period stock of foreign currency-denominated public debt , which bears interest at the rate i ; • E is the nominal exchange rate ; • L g is the nominal stock of credit allocated by the central bank. The left-hand side of Equation (2) captures the components of the budget deficit: spending on goods and services and debt service, net of taxes. The right-hand side shows that the government can finance its budget deficit by either issuing domestic bonds, borrowing abroad, or borrowing from the central bank. For simplicity, the central bank is assumed not to charge interest on its loans to the government (this has often been the case in practice). There are several points worth noting regarding Equation (2). • It does not consider explicitly foreign grants or revenues derived from assets such as natural resources and publicly owned capital –components that may, in practice, be important in some countries. For simplicity, these items are subsumed in T N . • It does not account explicitly for the cash income derived from the sale of public sector assets , such as receipts from the privatization of public enterprises.

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  Budget Deficits and Debt

  A Global Perspective

  • Siamack Shojai(Author)
  • 1999(Publication Date)
  • Praeger

    (Publisher)

  Hamilton and Flavin (1986) propose a measure of deficits that excludes interest payments but incorporates revenues from monetization and capital gains on gold. Using such a measure, they contend that the apparent 72 The Economic Consequences of Budget Deficits uninterrupted U.S. budget deficits from 1960 to 1981 grossly misstated the true fiscal posture of the government in the United States. ASSESSMENT The review of literature sketched above suggests that the deficit debate is still unresolved. Economists have genuine philosophical disagreements on the notion of crowding-out effect. Additionally, there is a mixed body of empirical evi- dence in regard to their philosophical positions. Our review of literature also suggests that there is not a commonly accepted measure of deficits. Finally, we cannot find an unequivocal body of evidence regarding the inflationary effects of deficits. DEFICITS AND INFLATION IN CANADA The Canadian federal (budget) deficits have been growing since the early 1970s when they were less than 1 percent of gross domestic product (GDP). Deficits assumed an upward trend in subsequent years, and the deficit-GDP ratio reached a peak of 7 percent in 1985. Streeter and Lemay (1993) indicate that Canada’s deficits rose by 70 percent between the late 1980s and early 1990s. Much of the increase came about in the early 1990s due to an economic down- turn that slowed revenue growth and generated upward pressure for government spending, particularly in social services. Concomitantly, there was a fundamental shift in the structure of the government deficits as provincial deficits became a more significant component of the overall deficits. Kneebone (1992) examined the effect of changes in the degree of centralization on the public sector’s share of GDP. The impetus for the structural change in Canada’s deficits, according to Kneebone, was citizen mobility.

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  Macroeconomic Theory

  A Dynamic General Equilibrium Approach - Second Edition

  • Michael Wickens(Author)
  • 2012(Publication Date)
  • Princeton University Press

    (Publisher)

  figure 5.1 , which plots government expenditures as a proportion of GDP for the United States and for the United Kingdom since 1901. Real government expenditures on goods and services and real social security benefits as a proportion of GDP have increased considerably over the last century. In 1901 they were only 2.3% of GDP for the United States and 13.5% for the United Kingdom. In most Western countries they increased from around 10–20% of GDP prior to World War I to around 40–50% after World War II. The wars themselves were the times of the greatest expansion in government expenditures. Since World War II, the shares of government expenditures in GDP have risen steadily and, apart from unemployment benefits, which vary countercyclically over the business cycle, they are not much affected by the business cycle. On average, the expenditures on goods and services and on transfers are roughly equal in size. Total government expenditures also include interest payments on government debt.

  Government revenues are primarily tax revenues: direct taxes on incomes and expenditure, social security taxes, and corporate taxes. The balance varies somewhat between countries, but for most developed countries direct taxes and social security taxes—which are in effect taxes on incomes—are about 60% of total tax revenue, consumption taxes are about 25%, and corporate taxes are about 10%. The average tax rate on incomes (including social security) is around 42%. Tax revenues tend to be more affected by the business cycle than expenditures. This is the main reason why government deficits tend to increase during a recession.

  As previously noted, governments can raise additional revenues through borrowing from the public or borrowing from the central bank, i.e., by printing money. The government simply extends its overdraft on its account with the central bank, which cashes checks issued to the public by the government.

  It is common in macroeconomics without microfoundations, such as Keynesian macroeconomics, to treat government expenditures as having no welfare benefits. They are included simply to allow fiscal policy to be included in the analysis and to allow the size of the fiscal multiplier to be calculated. In the standard Keynesian model this is the effect on GDP of a discretionary change in government expenditures. As this is tantamount to buying goods and services and then throwing them away—or, as Keynes himself noted, burying them— this is not a satisfactory formulation of fiscal policy. In our analysis we start by including government expenditures in the household’s utility function. We then discuss the issue of the optimal level of government expenditures. This is followed by an analysis of public finances: how best to pay for government expenditures and satisfy the government budget constraint. We also examine optimal tax policy, optimal debt, and the sustainability of fiscal deficits (the fiscal stance) in the longer term. At the end of the chapter we summarize our findings on the best way to manage fiscal policy.

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  The Euro

  Why it Failed

  • Jesper Jespersen(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  For those governments that do not have an independent currency and central bank, the public sector budget – that is, fiscal policy – is almost the only tool which is left to stabilise the economy as a whole. Hence, it is even more crucial to understand the role of public debt and deficits correctly.

  Let me now summarise the two sections on the ‘fallacy of composition’. They have provided simple examples of why macroeconomic results cannot, in general, be derived from microeconomic arguments assuming individual optimisation and fully flexible and self-adjusting markets. These conclusions are important because they provide theoretical arguments as to why monetarism cannot, in most cases, provide a realistic understanding of macroeconomic dynamics in terms of the economic consequences of the public sector.

  Different Concepts Related to the Public Sector Budget

  To understand what we are referring to when speaking about the public sector, we have to navigate some rather dry definitions and concepts related to public sector finances, budget and debt. Having reached a decent level of understanding, we are ready to see the public sector as an integrated part of the ‘economy as a whole’.

  1. 1.
     Current public sector budget (deficit), that is, public sector borrowing requirement: (expenses: public consumption, public real investment, social benefits and interest payments) minus (income/revenue: taxes, consumer charges and privatisations). In fact, this includes all cash flows except financial transactions, and is the definition used when fulfilments of convergence criteria and the Stability Pact are considered. The sole focus here is on public sector borrowing requirement. If real sector activity were the main concern related to the public sector budget, then one would instead recommend a split between public consumption (continuous stream) and public investments (a one-shot effect). Likewise, social expenditure can be separated into a structural part related to, among other things, old age pensions and a varying part dependent on unemployment benefit and related to the business cycle of the specific year.

     The EU’s convergence criteria and the Stability Pact limit the size of the current deficit at 3 percent of GDP – except for extraordinary cases with negative GDP growth.

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  Fiscal Policy, Stabilization, and Growth in Developing Countries

  • INTERNATIONAL MONETARY FUND(Author)
  • 1989(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  In the following analysis of the effects of the budget deficit on the current account, two major scenarios are considered, based on differences in the sources of financing of the budget deficit. In the first, the deficit is financed by external borrowing or by banking system credit, with credit to the private sector restrained, so that total credit from the banking system remains unchanged. In the second, the deficit is financed by an equivalent net increase in credit from the banking system. The effects of alternative financing methods on the domestic price level, output, and revenue are also analyzed. Special attention is paid to macroeconomic developments in recent years (especially during 1980-82) through the use of counter-factual simulations in which the budget deficit, measured as a percentage of gross national product (GNP), is held fixed at a desirable level.

  The plan of the paper is as follows. Section II presents some preliminary observations on the nature of the fiscal policy pursued during the period under analysis and on the causal relationship between the overall Government Budget Deficit and the current account balance. Section III outlines the structure of the model. The estimated model, along with some of its empirical characteristics, is discussed in Section IV . Section V reports on a variety of simulation exercises based on the model; concluding remarks are presented in Section VI .

  Passage contains an image

  II. RELATIONSHIP BETWEEN CURRENT ACCOUNT BALANCE AND BUDGET DEFICIT : SOME PRELIMINARY OBSERVATIONS

  In this section, movements in the overall Government Budget Deficit and the current account balance over the period 1970-82 are examined; the simultaneous movements between the current account balance and the capital account balance and changes in the net claims of the banking system on the Government are also examined (Chart 1 ).3 A casual comparison of the movements of the various variables seems to support the contention that the Philippines’ current account balance has been significantly influenced by movements in the overall budget deficit, particularly during 1980-82.

  Chart 1

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  The Debt Delusion

  Living Within Our Means and Other Fallacies

  • John F. Weeks(Author)
  • 2020(Publication Date)
  • Polity

    (Publisher)

  When discussing austerity and public budgets in general, a look at concrete experiences proves helpful, including inspection of statistics. Because national statistical offices do not always collect the same information, or when they do they do not present it in the same manner, a pragmatic approach is required. Throughout this book the analysis seeks to make comparisons, marshalling statistics from various countries, chosen for relevance to the issue under inspection. Effort is made to compare like with like, and this frequently restricts which countries can be compared.

  The practice of public budgeting, in contrast to the rhetoric, is shown in figures 0.1 and 0.2 , first for the United States, followed by the United Kingdom. Over the seven decades 1950 to 2018, the US federal government accounts showed an overall deficit in sixty of the sixty-eight years. Consecutive years without deficits occurred only twice, in 1956–7, when Dwight Eisenhower served as president, and from 1998 to 2001, during the presidency of Bill Clinton. The average for the seven decades was minus 2.2 percent of national income (gross national product). In practice, neither Democrat nor Republican presidential administrations considered it a problem requiring immediate correction when spending exceeded tax revenue, though rhetoric might have been otherwise. Governments of US neighbor Canada have shown a greater tendency to surpluses, though far from half the time, in eleven of the fiftyseven years between 1960 and 2017 (all consecutive, 1998–2008).

  Figure 0.1

  Public revenue minus spending for the United States, 1950–2018, percentage of gross domestic product

  Source: Annual Economic Report of the President, historical tables.

  Figure 0.2

  Public revenue minus spending for the United Kingdom, 1950–2017, percentage of gross domestic product

  Source: UK Office for National Statistics.

  Over the same seven decades as in figure 0.1

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  What Drives Prices in Egypt?

  An Analysis in Light of International Experience

  • Hanaa Kheir-El-Din(Author)
  • 2009(Publication Date)
  • The American University in Cairo Press

    (Publisher)

  LE /$ exchange rate. Inflation has a feedback effect on the budget deficit, net credit to the government, and exchange rate.

  Conclusion and Policy Implications

  The relationship between budget deficit and inflation is an important and controversial issue in the academic literature as well as in the economic policy field. The purpose of this chapter was to empirically investigate the short-run dynamics and long-run relationship between the budget deficit and the inflationary process in Egypt’s economy. After a review of theoretical and empirical literature of the relationship between budget deficit and the inflationary process, the most recent developments in the stance of fiscal policy and inflation dynamics in Egypt were analyzed. Johansen cointegration analysis and a vector error correction model (VECM) were utilized to empirically investigate the short-run dynamics and long-run relationship among the budget deficit, its sources of financing, and inflation dynamics from 1981/82 through 2005/06.

  The major finding of this study is that Egypt’s budget deficit and its sources of financing remain important drivers of inflationary pressures, making targeting price stability problematic. A large net government debt coupled with high servicing thereof had a role in determining inflation and inflation expectations by further increasing budget expenditures, and monetization expectations or convincing the markets that they eventually will be paid through an inflation tax. Besides generating inflationary pressures, budget deficit financing from the domestic banking system through extensive issuing of T-bills and government bonds was found to result in crowding out of private credit. This implies that the budget deficit has absorbed available resources that could otherwise have been more efficiently used by the private sector.

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  How Real is the Federal Deficit?

  • Robert Eisner(Author)
  • 2010(Publication Date)
  • Free Press

    (Publisher)

  7

  Deficits and the Economy:The Theory, Part II

  WE HAVE SO FAR CONCENTRATED on a world in which full employment is assured—or assumed. This is a world where all who want to work are working, and are working as much as they want. It is a world where all that we can produce is produced. There is no problem of being able to sell our output. The way to increase production—and income—is therefore to increase our ability to produce, that is, to increase supply. And we have explored potential effects of deficits on supply—finding them somewhat more enigmatic than many chose to believe.

  But every businessman knows that getting the goods is only half the problem, if that much. What is critical is being able to sell what you can produce. For any single firm that is a problem of the demand for its products. For the economy as a whole it is a problem of total, or aggregate demand.

  It is here that we will find major effects of federal budget deficits and federal debt. They can have a significant impact on aggregate demand. This impact can be good or bad, depending on the situation of our changing, dynamic economy, and depending on just how large the deficits and debt really are. The latter issue brings to the fore some of the critical questions of measurement we have been discussing. But the first essential question is, however large the deficit or debt, what difference does it make? Why should the deficit—the difference between government expenditures and government tax revenues—matter?

  To answer this, we must build upon a body of theory and analysis well known to most economists, and indeed to a generation or two of survivors of freshman economics courses. We also have to be familiar with some of the recent reservations and objections to this theory and analysis. If we are convinced beforehand that the reservations and objections have been sufficient to negate the analysis, we have in effect decided that deficits do not matter. Those so convinced have perhaps read too far already, and might well pursue a more promising pastime. Those still concerned may want to plunge on with us into the theory.

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