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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