budget deficit

Examples of budget deficit in the following topics:

• Effect of a Government Budget Deficit on Investment and Equilibrium

  • A budget deficit will typically increase the equilibrium output and prices, but this may be offset by crowding out.
  • The consequences of a budget deficit depend on the type of deficit .
  • As the economy grows more quickly, the budget deficit falls and the fiscal stimulus is slowly removed.
  • Unlike the cyclical budget deficit, a structural deficit is the result of discretionary, not automatic, fiscal policy.
  • The graph shows the budget deficits and surpluses incurred by the U.S. government between 1901 and 2006.

• Arguments for and Against Balancing the Budget

  • Balanced budgets, and the associated topic of budget deficits, are a contentious point within both academic economics and politics.
  • There is neither a budget deficit nor a budget surplus; in other words, "the accounts balance. " More generally, it refers to a budget with no deficit, but possibly with a surplus.
  • Balanced budgets, and the associated topic of budget deficits, are a contentious point within academic economics and within politics.
  • In the US, every state other than Vermont has a version of a balanced budget amendment, which prohibits some deficits.
  • If balanced budgets were required and if the budget was in deficit during a recession, critics argue that the required cuts would make the economy even worse off.

• Does U.S. Treasury Affect the Monetary Base?

  • Government finances budget deficits in three ways.
  • Could the U.S. federal government affect the monetary base by financing budget deficits?
  • Treasury finances a budget deficit by selling T-bills.
  • Treasury finance budget deficits.
  • However, the Fed can finance budget deficits indirectly.

• The Balance of Trade

  • The twin deficits hypothesis is a concept from macroeconomics that contends that there is a strong link between a national economy's current account balance and its government budget balance.
  • If (T-G) is negative, we have a budget deficit.
  • Assuming that the economy is at potential output (meaning Y is fixed), if the budget deficit increases and savings and investment remain the same, then net exports must fall, causing a trade deficit.
  • Thus, budget deficits and trade deficits go hand-in-hand .
  • The twin deficits hypothesis implies that as the budget deficit grows, net capital outflow from a country falls.

• Automatic Stabilizers

  • Automatic stabilizers are modern government budget policies that act to dampen fluctuations in real GDP.
  • The size of the government budget deficit tends to increase when a country enters a recession, which tends to keep national income higher by maintaining aggregate demand.
  • The result is an increase in the federal deficit without Congress having to pass any specific law or act.
  • Similarly, the budget deficit tends to decrease during booms, which pulls back on aggregate demand.
  • During boom times when the economy is doing well, people earn more income and this translates to higher tax revenues for the government, lowering the budget deficit.

• Arguments For and Against Fighting Recession with Expansionary Fiscal Policy

  • When taxes equal government expenditures, the government has a balanced budget.
  • When the government spends more than the revenue it collects, it has a deficit.
  • Increasing government spending, creating a budget deficit, and financing the shortfall through debt issuance are typical policy actions in an expansionary fiscal policy scenario.
  • When the government runs a budget deficit, funds will need to come from public or foreign borrowing.

• The Election Year Budget

  • The annual budget deficit is the difference between actual cash collections and budgeted spending (a partial measure of total spending) during a given fiscal year, which runs from October 1 to September 30.
  • The Obama administration's 2012 budget request focused on reducing annual deficits to more sustainable levels by making certain cuts in spending while continuing to support areas that would promote long-term economic growth, such as education and clean energy.
  • Instead, the budget request was projected to reduce government deficits by 1.1 trillion dollars over the next ten years.
  • Republicans have criticized the president's plan for not going far enough to reduce future deficits.
  • This budget request is President Obama’s first on-time budget proposal since 2011.

• The Budgeting Process

  • However, Congress is the body required by law to pass a budget annually and to submit the budget passed by both houses to the President for signature.
  • These include the Government Accountability Office (GAO), Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S.
  • As such, most of these expenses were not included in the budget deficit calculation prior to FY2010.
  • The annual budget deficit is the difference between actual cash collections and budgeted spending (a partial measure of total spending) during a given fiscal year, which runs from October 1 to September 30.
  • Since 1970, the U.S. federal government has run deficits for all but four years (1998–2001) contributing to a total debt of $16.1 trillion as of September 2012.

• Gridlock in Government

  • Reagan’s policies of cutting taxes and increasing defense spending in relation to the Cold War had exploded the federal budget deficit, making it three times larger in 1989 than when Reagan took office in 1980.
  • The deficit had reached a high of $220 billion in 1990.
  • He began an effort to persuade the Democratic controlled Congress to act on the budget.
  • Bush was further constrained by the emphatic pledge he had made at the 1988 Republican Convention—“read my lips: no new taxes”—and found himself in the difficult position of trying to balance the budget and reduce the deficit without breaking his promise.
  • Near the end of the 101st Congress, the president and congressional members reached a compromise on a budget package with the Omnibus Budget Reconciliation Act of 1990.

• Problems of Long-Run Government Debt

  • Deficit spending during times of recession widely seen as a beneficial policy that can mitigate the effects of an economic downturn.
  • However, even Keynesians that support deficit spending during recessions advise that governments balance this deficit spending with surpluses during the eventual economic boom.
  • This is known as a cyclically balanced budget; the government runs a deficit during recessions and lean years but a surplus during periods of significant growth.
  • To offset the budgetary deficits and raise the necessary funds to pay down debt, governments will ultimately have to lower costs and raise taxes.
  • Since Congress is responsible for making budgetary, spending and taxation decisions, and because these elected officials may be disinclined to do anything that would hurt their chances to be re-elected, taking the necessary steps to balance out the periods of deficit spending during economic boom is difficult.