© 2005 mcgraw-hill ryerson ltd. macroeconomics, chapter 10 1 deficits, surpluses, & the public...

© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 10Macroeconomics, Chapter 10 11

Deficits, Deficits, Surpluses, Surpluses,

& the & the Public Public DebtDebt

Deficits, Deficits, Surpluses, Surpluses,

& the & the Public Public DebtDebt PUBLIC VISA

PublicPublic Mastercard Mastercard

PUBLIC VISA

PublicPublic Mastercard Mastercard

SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGESLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE


In this chapter you will learnIn this chapter you will learn

10.110.1 The definitions of budget surplus, budget The definitions of budget surplus, budget deficit, the public debt, and the diverse deficit, the public debt, and the diverse budget philosophiesbudget philosophies

10.210.2 About the recent Canadian budget About the recent Canadian budget surpluses, deficits, and public debtsurpluses, deficits, and public debt

10.310.3 The misconceptions about budget deficits The misconceptions about budget deficits and the national debtand the national debt

10.410.4 The substantive issues about budget The substantive issues about budget deficits and the public debtdeficits and the public debt

10.510.5 About recent budgetary surpluses About recent budgetary surpluses


Chapter 10 TopicsChapter 10 Topics

10.110.1 Deficits, Surpluses & Debt: Deficits, Surpluses & Debt: Definitions & PhilosophiesDefinitions & Philosophies

10.210.2 The Public Debt: Facts & Figures The Public Debt: Facts & Figures

10.310.3 False Concerns False Concerns

10.410.4 Substantive Issues Substantive Issues

10.510.5 Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent


Deficit & Debt: DefinitionsDeficit & Debt: Definitions

Budget DeficitBudget Deficit Annual amount by which government Annual amount by which government

expenditures exceed taxesexpenditures exceed taxes E.g. 1996-97 deficit = $13.5 billionE.g. 1996-97 deficit = $13.5 billionPublic DebtPublic Debt Accumulation of all past deficits & Accumulation of all past deficits &

surplusessurpluses E.g. 2002 public debt =$640 billionE.g. 2002 public debt =$640 billion


Budget PhilosophiesBudget Philosophies

Annually Balanced BudgetAnnually Balanced Budget– G = T every yearG = T every year– Intensifies the cycle (pro-cyclical)Intensifies the cycle (pro-cyclical)– Some believe this approach constrains an Some believe this approach constrains an

undesirable expansion of the public sectorundesirable expansion of the public sector



Cyclically Balanced BudgetCyclically Balanced Budget– G = T over each business cycleG = T over each business cycle– Deficits in recessionary downswingsDeficits in recessionary downswings– Surpluses in inflationary upswingsSurpluses in inflationary upswings– Counter-cyclical (stabilizes the cycle)Counter-cyclical (stabilizes the cycle)– Not workable in practiceNot workable in practice

Annually Balanced BudgetAnnually Balanced Budget



Cyclically Balanced BudgetCyclically Balanced Budget

Annually Balanced BudgetAnnually Balanced Budget

Functional FinanceFunctional Finance– Balancing the budget is of secondary Balancing the budget is of secondary

importanceimportance– Primary focus is on stabilizing economyPrimary focus is on stabilizing economy


The Public DebtThe Public Debt: : Facts & FiguresFacts & Figures

Government of Canada Public Debt, Selected Years

0

100

200

300

400

500

600

700

1926

1929

1940

1946

1954

1960

1966

1969

1973

1975

1979

1983

1988

1991

1997

2000

2002

Gro

ss f

eder

al p

ub

lic

deb

t (b

illi

on

s)

0

20

40

60

80

100

120

140

160

% o

f G

DP

gross federal public debt (billions)

% of GDP



CausesCauses WarsWars RecessionsRecessions Lack Of Political WillLack Of Political Will



Quantitative AspectsQuantitative Aspects Debt & GDPDebt & GDP

– relative size of the debt now decreasingrelative size of the debt now decreasing International ComparisonsInternational Comparisons

– our debt is 4our debt is 4thth highest as % of GDP among highest as % of GDP among world’s industrialized nationsworld’s industrialized nations


Global Perspective 10.1Global Perspective 10.1

Public Debt: International Comparisons

0 50 100 150

AustraliaDenmark

U.K.Finland

United StatesGermanySweden

NetherlandsFrance

SpainCanadaBelgium

ItalyJapan

% of GDP, 2002



Quantitative AspectsQuantitative Aspects Debt & GDPDebt & GDP International ComparisonsInternational Comparisons Interest ChargesInterest Charges

– recently have begun to decline (as % of recently have begun to decline (as % of GDP)GDP)



Interest Payments as % of GDP, Selected Years

0

1

2

3

4

5

6

7

1926

1929

1940

1946

1954

1960

1966

1969

1973

1975

1979

1983

1988

1991

1997

2000

2002



Quantitative AspectsQuantitative Aspects Debt & GDPDebt & GDP International ComparisonsInternational Comparisons Interest ChargesInterest Charges OwnershipOwnership

– foreign-owned debt an issueforeign-owned debt an issue


Ownership of Canada's Public Debt in 2002Total debt: $540 billion

Public & chartered

banks75%

Bank of Canada8%

Non-residents17%

Figure 10-1Figure 10-1


False ConcernsFalse Concerns

BankruptcyBankruptcy– RefinancingRefinancing– TaxationTaxation

Burdening Future GenerationsBurdening Future Generations– Canada owes a substantial portion of the Canada owes a substantial portion of the

public debt to itselfpublic debt to itself


Substantive IssuesSubstantive Issues

Income DistributionIncome Distribution IncentivesIncentives External DebtExternal Debt Crowding-Out & the Stock of CapitalCrowding-Out & the Stock of Capital

IIgg

Investment (billions of dollars)Investment (billions of dollars)

Rea

l in

tere

st r

ate

(per

cen

t)R

eal

inte

rest

rat

e (p

erce

nt)

Increasing the debt mayIncreasing the debt mayput upward pressure onput upward pressure oninterest rates. The higher interest rates. The higher interest rates may reduce interest rates may reduce private Investment (Iprivate Investment (Igg))

1616

1414

1212

1010

88

66

44

22

005 10 15 20 25 30 35 405 10 15 20 25 30 35 40

The Crowding Out EffectThe Crowding Out EffectFigure 10-2Figure 10-2



The Crowding Out EffectThe Crowding Out Effect

QualificationsQualifications Public investmentPublic investment Public-private complementaritiesPublic-private complementarities

IIgg

Rea

l in

tere

st r

ate

(per

cen

t)R

eal

inte

rest

rat

e (p

erce

nt)

1616

1414

1212

1010

88

66

44

22

005 10 15 20 25 30 35 405 10 15 20 25 30 35 40

The Crowding Out EffectThe Crowding Out EffectThe crowding out effect The crowding out effect may be partially offset may be partially offset by increased private by increased private investment, due to investment, due to improvements in improvements in infrastructureinfrastructure

Investment (billions of dollars)Investment (billions of dollars)

Figure 10-2Figure 10-2



Deficits & Surpluses: 1990 to the Deficits & Surpluses: 1990 to the PresentPresent

federal deficits & the debt were main federal deficits & the debt were main focus of fiscal policy during first half of focus of fiscal policy during first half of 1990s1990s

from a deficit of $40 billion in 1993, cuts from a deficit of $40 billion in 1993, cuts in spending & tax increases resulted in in spending & tax increases resulted in a surplus of $6 billion+ in 2003a surplus of $6 billion+ in 2003

Federal Budget Deficits & Surpluses (billions)Federal Budget Deficits & Surpluses (billions)



What to do with the Surpluses?What to do with the Surpluses?

Pay Down the Public DebtPay Down the Public Debt Reduce TaxesReduce Taxes Increase Public ExpendituresIncrease Public Expenditures Combinations of PoliciesCombinations of Policies

– Likely DirectionsLikely Directions

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