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ECON5102 Macroeconomics
Lecture 8
THE GOVERNMENT
AND THE MACROECONOMY
(Fiscal Policy)
1 Introduction
• In this chapter, we learn (Jones Chapter 18):
Government spending, taxation, budget deficits, and the debt-
GDP ratio
The government’s intertemporal budget constraint
The economic consequences of budget deficits
The fiscal problem of the twenty-first century: how to finance
rising health expenditures
Introduction
• The government can borrow or lend
But the government’s budget must balance in PDV
Budget deficits today must be offset by budget surpluses in the
future
• Recent forecasts suggest current U.S. policies are unsustainable
2 U.S. Government Spending and Revenue
• In 2015, government spending in the United States
Was $6.0 trillion
20.6 percent of GDP
More than $18,500 per person
• Tax revenues were 18 percent of GDP
The U.S. Federal Government Budget, 2015
Australia Government Budget, 2008-2017
Australia Government Debt, 2008-2017
Australia Budget Composition 2016-2017
Australia: Revenue vs Expenditure 1989-2018
Government Spending and Revenue
• The budget balance
The difference between tax revenues and spending
• A budget surplus
Tax revenues is greater than Spending
• A budget deficit
Tax revenues is lower than Spending
The government must borrow by selling bonds
• A balanced budget
Tax revenues equal Spending
Spending and Revenue over Time
• World War II
Taxes and expenditures rose sharply
• After the war:
spending and revenues were an approximately stable fraction of
GDP
• Budget deficits emerged starting around 1970
U.S. Federal Government Revenue and Spending
The Debt-GDP Ratio-1
• Government debt
The outstanding stock of bonds that have been issued in the
past
• In 2005
The debt-GDP ratio was 35 percent
• In 2011
The debt-GDP ratio was 74 percent
• Half of the debt is owed to foreigners
The Debt-GDP Ratio-2
• The net debt:
Government debt that is held outside of the government
• In 2015, including debt held by the government, total debt-
GDP was more than 100 percent
Federal Debt and Deficits in the United States
3 International Evidence on Spending and Debt
• Among the richer OECD countries, the United States has a
lower than average:
Government spending to GDP ratio (40 percent)
Debt-GDP ratio
• Norway
Negative debt-GDP ratio
Saves its surpluses
Government Spending Around the World, 2014
Debt-GDP Ratios around the World
4 The Government Budget Constraint
• The flow version of the government budget constraint holds in
each period
• The sources of funds to the government must equal the uses of
funds
Gt + Trt + iBt︸ ︷︷ ︸
uses
= Tt + ∆Bt+1 + ∆Mt+1︸ ︷︷ ︸
sources
4 The Government Budget Constraint (cont.)
The Government Budget Constraint
• Assume for this chapter
The change in the stock of money is zero
Transfer payments are zero