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Budget Deficits and the National Debt

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Basics about Deficits National debt: total amount owed by government Budget deficit : government spending minus government revenue Typically financed by issuing government bonds Size measured as a percent of GDP Rises during recessions regardless of policy due to decline in government revenue and increase in social welfare payments Structural deficit : deficit if the economy was operating at its potential

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Impact of Deficits & Debt Depends on size and method of financing Domestic financing tends to crowd out other borrowers Foreign financing leads to stronger currency and larger trade deficit May also create dependence on foreign funds, which tend to be more volatile Central bank financing puts upward pressure on inflation Whats too high?