The use of government spending and taxing to achieve economic growth, full employment and

stable prices.

FISCAL POLICYChapter 15

The Federal Budget• An annual plan outlining proposed

revenues and expenditures for the coming year (Oct 1-Sept 30). Currently a budget for this year has not been agreed upon.

• The President through the Office of Management and Budget (OMB) and Congress with the help of the Congressional Budget Office (CBO) work together to draw up the next year’s budget.

The Federal government may use fiscal policy to make the economy

run more smoothly.If we are in a recession the government would use expansionary fiscal policy

To expand the economy it would increase government spending and decrease taxes

If we have inflation the government would use contractionary fiscal policy

To contract the economy it would decrease government spending and increase taxes

GDP and CBO’s Estimate of Potential GDP, 2000 to 2019GDP is expected to continue to decline into 2010

http://www.cbo.gov/

Trillions of dollars

Federal Spending

• Spending for 2010 was

• $3.518 trillion.

• Tax revenue for 2010 was

• $2.105 trillion.

• 2010 deficit was $1.413 trillion.

If government spending exceeds government revenue (taxes) within one year it is called a budget deficit

If government revenue exceeds government spending within one year it is called a budget surplus

Government Debt and Deficits

The Total Deficit or Surplus 1969 to 2016

Q. How does the government spend money it does not have?

A. They could print more, which would lead to inflation or they have to borrow it.

Q. How does the government borrow money?A. They sell U.S. treasury bonds, treasury

bills, or treasury notes. Q. Who do they borrow it from? A. Us (individuals, banks, and governments)

and foreigners.

The Federal Debt is the total of all budget deficits and budget surpluses in our history.

http://www.usdebtclock.org/

Problems of a National DebtCrowding-out effect

When government borrows it competes with businesses for savers’ dollars making it harder for businesses to borrow. A decrease in business spending reduces overall GDP.

Interest Payments on the Debt• Interest must be paid to bondholders and

over the years the interest payments have become very large. The 2011 interest payment will be $188 billion. This will be 4.9% of the budget.

• An increase in interest payments means a decrease in spending somewhere else. There is a large opportunity cost involved here.

Problems of a National Debt

Debt Held by Foreign Citizens

• The majority of the interest payments go to U.S. citizens, but the number of foreign holders of U.S. debt has increased to about 44% today.

Problems of a National Debt