In this chapter, the following content will be discussed: When government spending > revenues, it must borrow money: debt is the sum of past deficits & surpluses; economic research centers on whether future generations carry the burden of government debt; several factors influence whether government should finance expenditures through taxes or debt;. | DEFICIT FINANCE Chapter 20 How Big Is the Deficit? Deficit Surplus On-budget deficit Off-budget deficit 20- How Big Is the Deficit? Source: Congressional Budget Office [2012b] 20- How Big Is the Debt? National (Public) Debt Stocks vs. Flows 20- How Big Is the Debt? Source: Congressional Budget Office [2012b] 20- 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- The Burden of the Debt Statutory versus Economic Incidence One Hand Borrows from the Other Internal Debt External Debt 20- Overlapping Generations Model The Period 2010-2030 Young Middle-Aged Old (1) Income $12,000 $12,000 12,000 (2) Government Borrowing -6,000 -6,000 (3) Government- provided consumption 4,000 4,000 4,000 The Year 2030 Young Middle-Aged Old (4) Government raises taxes | DEFICIT FINANCE Chapter 20 How Big Is the Deficit? Deficit Surplus On-budget deficit Off-budget deficit 20- How Big Is the Deficit? Source: Congressional Budget Office [2012b] 20- How Big Is the Debt? National (Public) Debt Stocks vs. Flows 20- How Big Is the Debt? Source: Congressional Budget Office [2012b] 20- 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- The Burden of the Debt Statutory versus Economic Incidence One Hand Borrows from the Other Internal Debt External Debt 20- Overlapping Generations Model The Period 2010-2030 Young Middle-Aged Old (1) Income $12,000 $12,000 12,000 (2) Government Borrowing -6,000 -6,000 (3) Government- provided consumption 4,000 4,000 4,000 The Year 2030 Young Middle-Aged Old (4) Government raises taxes to pay back debt -4,000 -4,000 -4,000 (5) Government pays back debt +6,000 +6,000 20- Lerner – generation is everyone alive at same time Alternative – generation is everyone born at the same time Each generation has equal number of people Each lives 20 years Each has fixed income of $12,000/year Internal debt creates burden for future generations Overlapping Generations Model Generational Accounting Computation of Net Tax PV of transfers received – PV of taxes paid 20- OG model using generational accounting to evaluate impact of Government fiscal policies Other Models Neoclassical Model Crowding Out Hypothesis Empirical testing of the hypothesis Ricardian Model Intergenerational transfers Form of Finance is irrelevant Empirical evidence 20- To Tax or To Borrow Benefits-Received Principle Intergenerational Equity Efficiency Considerations χ = ½εLt2 Deficits and Functional Finance Functional finance Moral and Political Considerations Federal Debt and the Risk of
