The Government Budget Prospects and Implications Andrew B Abel

Document Sample
The Government Budget Prospects and Implications Andrew B Abel Powered By Docstoc
					     The Government Budget:
    Prospects and Implications
                       Andrew B. Abel
                       March 13, 2000




   National Saving and Wealth
• Income Statement Concepts
  • Output: Y = C + I + G + NX
  • National Saving: S = Y - C - G = I + NX
• Balance Sheet Concept
  • National Wealth = domestic capital stock + net
    foreign assets



     The Government Budget: Prospects and Implications, Professor Andrew Abel   2
 Link Between Balance Sheet and
       Income Statement

• National Saving = Growth of National Wealth

  • S = I + NX
     • I = growth of domestic capital stock
     • NX = growth of net foreign assets




       The Government Budget: Prospects and Implications, Professor Andrew Abel   3




       Capital Gains and Saving
 • Capital gain for an individual
   • Increases current income
   • If not spent:
      • Increases current saving
      • Increases wealth at end of year
 • Capital gain can increase current and/or
   future consumption of individual

       The Government Budget: Prospects and Implications, Professor Andrew Abel   4
Capital Gain in Closed Economy:
      National Perspective

• S=I
• If add capital gain to national output, Y
  • S would increase
  • Would have to add capital gain to I
     • But I is intended to measure gross capital formation,
       which affects capacity to produce and consume in
       future

      The Government Budget: Prospects and Implications, Professor Andrew Abel   5




       Source of Capital Gains
                                     Dividend
         Asset price =                        + bubble
                                       r−g
• Increase in dividend, current or future
  • Reflects increase in current or future output
• Decrease in r
  • Does not reflect increased current or future
    output
• Bubble
  • Unrelated to current or future output
      The Government Budget: Prospects and Implications, Professor Andrew Abel   6
              Capital Gains:
          Individual vs. National
• Increase ability of individual to consume
• May not affect ability of nation to consume

• Example: Stock market bubble
  • Increases wealth of individual owners
  • Does not increase ability of nation as a whole to
    consume

       The Government Budget: Prospects and Implications, Professor Andrew Abel    7




  U.S. National Saving, 1999-III
    1999-III                                      $billions % of GDP    $/person
    Gross Private Saving                           1355.7        14.6      5003
       Personal                                      139.5        1.5        515
       Business                                    1216.1        13.1       4487

    Gross Government Saving                         379.9         4.1      1402
      Federal saving                                225.1         2.4       831
      State and local saving                        154.8         1.7       571

    Total National Saving                          1735.6        18.7      6404

    Investment                                     1930.7        20.8       7124
       Private                                     1635.0        17.6       6033
       Federal - defense                             53.4         0.6        197
       Federal - nondefense                          41.5         0.4        153
       State and local                              200.8         2.2        741
    Current Account Balance                        -336.3        -3.6      -1241
    Investment + Current Account Balance           1594.4        17.1       5883

    Statistical Discrepancy                        -141.2        -1.5       -521
      Source: Survey of Current Business, February 2000.
       The Government Budget: Prospects and Implications, Professor Andrew Abel    8
          Gross Government Saving
                  1999-III
               1999-III                                                  $billions
               Gross Government Saving                                     379.9
                 Federal saving                                            225.0
                       Receipts                                           1883.1
                       Current expenditures                               1749.3
                    Current surplus                                         133.8
                    Consumption of fixed capital                             91.2
                 State and local saving                                    154.9
                       Receipts                                           1148.0
                       Current expenditures                               1099.1
                    Current surplus                                          48.9
                    Consumption of fixed capital                            106.0

                 Source: Survey of Current Business, February 2000.
            The Government Budget: Prospects and Implications, Professor Andrew Abel        9




   Discretionary Outlays under
 Alternative Versions of Baseline




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 4-3, p. 80.

            The Government Budget: Prospects and Implications, Professor Andrew Abel       10
Budget Outlook under Current Policies




     Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 1, p. xiv.
                  The Government Budget: Prospects and Implications, Professor Andrew Abel            11




             International Comparison of
                  Fiscal Balances: I




Percent of GDP. Source: World Economic Outlook, International Monetary Fund, October 1999, Table 14, p. 188.



                  The Government Budget: Prospects and Implications, Professor Andrew Abel            12
              International Comparison of
                   Fiscal Balances: II




Percent of GDP. Source: World Economic Outlook, International Monetary Fund, October 1999, Table 15, p. 190.
                  The Government Budget: Prospects and Implications, Professor Andrew Abel             13




    Gross Government Debt in Europe
                                     (percent of GDP)
                                                        1996       1997
                                    Belgium            130.0      127.1
                                    Italy              123.0      121.5
                                    Greece             110.7      107.7
                                    Sweden               78.6       76.6
                                    Netherlands          78.8       76.1
                                    Ireland              76.4       72.3
                                    Portugal             70.8       69.2
                                    Spain                69.5       69.0
                                    Austria              69.8       68.1
                                    Denmark              69.9       67.3
                                    Germany              60.3       61.5
                                    Finland              58.0       58.7
                                    France               56.3       57.8
                                    UK                   49.3       49.4
                                    Luxembourg            5.9        5.7
     Source: World Economic Outlook, International Monetary Fund, May 1997, Table 5. P. 27.
                 The Government Budget: Prospects and Implications, Professor Andrew Abel              14
       Revenues as a Share of GDP




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 3-2, p. 51.
            The Government Budget: Prospects and Implications, Professor Andrew Abel       15




                   Revenues by Source




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 3-3, p. 53
            The Government Budget: Prospects and Implications, Professor Andrew Abel       16
                                                        Outlays
                 • Discretionary spending
                       • Annual appropriation
                       • Defense, education, transportation, ...
                 • Mandatory spending (Entitlements)
                       • Eligibility rules and benefit formulas
                 • Offsetting receipts
                       • e.g., drilling leases for Outer Continental Shelf
                 • Net interest
                             The Government Budget: Prospects and Implications, Professor Andrew Abel          17




                               Federal Outlays, 1962-1999
                 14                     Discretionary
                 12
                 10
Percent of GDP




                   8
                                            Entitlements and other mandatory
                   6
                   4
                   2                                                Net interest
                   0                  Offsetting receipts
                  -21962        1967         1972           1977      1982         1987       1992          1997


                 Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table E-9, p. 143.
                            The Government Budget: Prospects and Implications, Professor Andrew Abel           18
                   The Peace Dividend




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 4-3, p. 75.
           The Government Budget: Prospects and Implications, Professor Andrew Abel        19




Nondefense Discretionary Spending




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Figure 4-2, p. 78.
            The Government Budget: Prospects and Implications, Professor Andrew Abel       20
   Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 2, p. xvi.
              The Government Budget: Prospects and Implications, Professor Andrew Abel              21




                           (percent of GDP)




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 2, p. xvi.
              The Government Budget: Prospects and Implications, Professor Andrew Abel              22
Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 3, p. xvii.
              The Government Budget: Prospects and Implications, Professor Andrew Abel             23




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Summary Table 4, p. xviii.
              The Government Budget: Prospects and Implications, Professor Andrew Abel             24
                              Alternative Measure of
                                  Fiscal Balance
                              Actual and Standard Federal Budget Balances
                                              1960-1999

                      2
                      1                                                  Standardized
                      0
    Percent of GDP




                     -11960     1965      1970       1975      1980       1985      1990      1995
                     -2
                     -3
                     -4
                     -5
                                         Actual
                     -6
                     -7

Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table E-1, p. 135.
    Standardized budget excludes deposit insurance, receipts from auctions of electromagnetic spectrum,
    timing adjustments, and constributions from allied nations for Operation Desert Storm.
                         The Government Budget: Prospects and Implications, Professor Andrew Abel    25




              Projections of Federal Debt: I




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-5, p. 20.
                         The Government Budget: Prospects and Implications, Professor Andrew Abel    26
    Projections of Federal Debt: II




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-5, p. 20.
            The Government Budget: Prospects and Implications, Professor Andrew Abel      27




   Projections of Federal Debt: III




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-5, p. 20.
            The Government Budget: Prospects and Implications, Professor Andrew Abel      28
                  Trust Fund Surpluses




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 1-6, p. 23.
            The Government Budget: Prospects and Implications, Professor Andrew Abel          29




                     Burden of the Debt
                  (end of FY99, billions of dollars)

Gross Federal Debt
 Held by public                                                                        3633
 Held by government                                                                    1973
      Social Security                                             855
      Other government accounts                                   1118
Total Gross Federal Debt                                                               5606
Debt Subject to Limit                                                                  5568
• Debt ceiling
   • raised to $5500 billion in March 1996
   • raised to $5950 billion in Balanced Budget Act of 1997
            The Government Budget: Prospects and Implications, Professor Andrew Abel          30
      Two Views of Burden of Debt
• “We Owe it to Ourselves” ==> No Burden
   • $1973 billion held by gov’t is no burden
   • $3633 billion held by public is owed to public
         • but foreigners own some of this debt
• Burden, even if U.S. citizens owned all of debt
   • Crowds out capital stock
         • Reduces long-run wages and output per person


             The Government Budget: Prospects and Implications, Professor Andrew Abel       31




               Federal Interest Outlays




 Source: CBO, The Economic and Budget Outlook: Fiscal Years 2001-2010, Table 4-10, p. 94.
             The Government Budget: Prospects and Implications, Professor Andrew Abel       32
          Debt/GDP Ratio in the United States
1.4


1.2
                            Gross Debt/GDP
 1


0.8


0.6


0.4


0.2
                                                                  Net Debt/GDP
 0
 1869 1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999
         The Government Budget: Prospects and Implications, Professor Andrew Abel   33




       Changes in Debt-GDP Ratio
                                           B
• Debt-GDP Ratio:
                                          GDP

• Growth of numerator: deficit
      • Primary deficit + net interest
• Growth of denominator: nominal GDP
  growth


         The Government Budget: Prospects and Implications, Professor Andrew Abel   34
                Factors Causing
             Debt-GDP Ratio to Rise
• Large Primary Deficits (deficit minus interest)
     • Wars
     • Great Depression
     • 1980s and first half of 1990s
• High (Real) Interest Rates
• Low GDP growth
     • Great Depression

            The Government Budget: Prospects and Implications, Professor Andrew Abel            35




Effect on Deficit of 1 Percentage
Point Reduction in Measured CPI
              (fiscal years, billions of dollars)
                              1998     2000      2007
        ∆ Revenues             1.9      10.5      44.2
        ∆ Outlays
          Social Security     -2.8     -10.7     -44.6
          Debt Service        -0.2      -2.0     -32.0
          Other               -0.9      -4.5     -19.3
        ∆ Total Outlays       -3.9     -17.2     -95.9
        ∆ Deficit             -5.8     -27.7 -140.1
Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1998-2007,
    January 1997, p. 41.

            The Government Budget: Prospects and Implications, Professor Andrew Abel            36
      Long-Run Deficit Projections
                         (Calendar year, percentage of GDP)




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Table 2-5, p. 43.

            The Government Budget: Prospects and Implications, Professor Andrew Abel       37




         Long-Run Debt Projections
            (Debt held by public, calendar year, percentage of GDP)




Source: CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, Figure 2-2, p. 44.
           The Government Budget: Prospects and Implications, Professor Andrew Abel        38
              Social Security:
           Demographic Time Bomb
          Beneficiaries per 100 Covered Workers
        80
        70
        60
        50                                                                    Intermediate
        40                                                                    Low Cost
        30                                                                    High Cost
        20
        10
         0
         1999 2009 2019 2029 2039 2049 2059 2069
      Source: 1999 OASDI Trustees Report, Table II.F.19
             The Government Budget: Prospects and Implications, Professor Andrew Abel    39




             OASDI Trust Fund Ratio
600


500


400
                                                                                 Intermediate
300                                                                              High Cost
                                                                                 Low Cost
200


100


  0
  1999       2009   2019    2029     2039    2049    2059     2069
Source: 1999 OASDI Trustees Report, Table II.F.20
             The Government Budget: Prospects and Implications, Professor Andrew Abel    40
               Possible Solutions
• Increase Contributions by Workers
  • Increase retirement age
• Reduce Benefits Paid to Retirees
  • Increase retirement age
  • Tax Social Security benefits
• Earn Higher Return on Assets in Trust Fund
  • Invest in equities
• Privatize Social Security
  • Individuals control allocation of assets
  • Transitional problems
      The Government Budget: Prospects and Implications, Professor Andrew Abel   41