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The path from deficits to surpluses to deficits

Why did the budget deficits suddenly turn to surpluses from 1998 to 2001? And why did the surpluses return to deficits in 2002? Why did the deficit become so large after 2007? [link] suggests some answers. The graph combines the earlier information on total federal spending and taxes in a single graph, but focuses on the federal budget since 1990.

Total government spending and taxes as a share of gdp, 1990–2014

The graph shows that total spending and tax receipts rise and fall in contrast to one another. In 1990, total spending was around 22% whereas tax receipts which were just under 18%. In 2014, total spending was around 22% whereas tax receipts were around 17%.
When government spending exceeds taxes, the gap is the budget deficit. When taxes exceed spending, the gap is a budget surplus. The recessionary period starting in late 2007 saw higher spending and lower taxes, combining to create a large deficit in 2009. (Source: Economic Report of the President, Tables B-21 and B-1, "http://www.gpo.gov/fdsys/pkg/ERP-2015/content-detail.html)

Government spending as a share of GDP declined steadily through the 1990s. The biggest single reason was that defense spending declined from 5.2% of GDP in 1990 to 3.0% in 2000, but interest payments by the federal government also fell by about 1.0% of GDP. However, federal tax collections increased substantially in the later 1990s, jumping from 18.1% of GDP in 1994 to 20.8% in 2000. Powerful economic growth in the late 1990s fueled the boom in taxes. Personal income taxes rise as income goes up; payroll taxes rise as jobs and payrolls go up; corporate income taxes rise as profits go up. At the same time, government spending on transfer payments such as unemployment benefits, foods stamps, and welfare declined with more people working.

This sharp increase in tax revenues and decrease in expenditures on transfer payments was largely unexpected even by experienced budget analysts, and so budget surpluses came as a surprise. But in the early 2000s, many of these factors started running in reverse. Tax revenues sagged, due largely to the recession that started in March 2001, which reduced revenues. A series of tax cuts was enacted by Congress and signed into law by President George W. Bush, starting in 2001. In addition, government spending swelled due to increases in defense, healthcare, education, Social Security, and support programs for those who were hurt by the recession and the slow growth that followed. Deficits returned. When the severe recession hit in late 2007, spending climbed and tax collections fell to historically unusual levels, resulting in enormous deficits.

Longer-term forecasts of the U.S. budget, a decade or more into the future, predict enormous deficits. The higher deficits run during the recession of 2008–2009 have repercussions, and the demographics will be challenging. The primary reason is the “baby boom”—the exceptionally high birthrates that began in 1946, right after World War II, and lasted for about two decades. Starting in 2010, the front edge of the baby boom generation began to reach age 65, and in the next two decades, the proportion of Americans over the age of 65 will increase substantially. The current level of the payroll taxes that support Social Security and Medicare will fall well short of the projected expenses of these programs, as the following Clear It Up feature shows; thus, the forecast is for large budget deficits. A decision to collect more revenue to support these programs or to decrease benefit levels would alter this long-term forecast.

What is the long-term budget outlook for social security and medicare?

In 1946, just one American in 13 was over age 65. By 2000, it was one in eight. By 2030, one American in five will be over age 65. Two enormous U.S. federal programs focus on the elderly—Social Security and Medicare. The growing numbers of elderly Americans will increase spending on these programs, as well as on Medicaid. The current payroll tax levied on workers, which supports all of Social Security and the hospitalization insurance part of Medicare, will not be enough to cover the expected costs. So, what are the options?

Long-term projections from the Congressional Budget Office in 2009 are that Medicare and Social Security spending combined will rise from 8.3% of GDP in 2009 to about 13% by 2035 and about 20% in 2080. If this rise in spending occurs, without any corresponding rise in tax collections, then some mix of changes must occur: (1) taxes will need to be increased dramatically; (2) other spending will need to be cut dramatically; (3) the retirement age and/or age receiving Medicare benefits will need to increase, or (4) the federal government will need to run extremely large budget deficits.

Some proposals suggest removing the cap on wages subject to the payroll tax, so that those with very high incomes would have to pay the tax on the entire amount of their wages. Other proposals suggest moving Social Security and Medicare from systems in which workers pay for retirees toward programs that set up accounts where workers save funds over their lifetimes and then draw out after retirement to pay for healthcare.

The United States is not alone in this problem. Indeed, providing the promised level of retirement and health benefits to a growing proportion of elderly with a falling proportion of workers is an even more severe problem in many European nations and in Japan. How to pay promised levels of benefits to the elderly will be a difficult public policy decision.

In the next module we shift to the use of fiscal policy to counteract business cycle fluctuations. In addition, we will explore proposals requiring a balanced budget—that is, for government spending and taxes to be equal each year. The Impacts of Government Borrowing will also cover how fiscal policy and government borrowing will affect national saving—and thus affect economic growth and trade imbalances.

Key concepts and summary

For most of the twentieth century, the U.S. government took on debt during wartime and then paid down that debt slowly in peacetime. However, it took on quite substantial debts in peacetime in the 1980s and early 1990s, before a brief period of budget surpluses from 1998 to 2001, followed by a return to annual budget deficits since 2002, with very large deficits in the recession of 2008 and 2009. A budget deficit or budget surplus is measured annually. Total government debt or national debt is the sum of budget deficits and budget surpluses over time.

Problems

If a government runs a budget deficit of $10 billion dollars each year for ten years, then a surplus of $1 billion for five years, and then a balanced budget for another ten years, what is the government debt?

Got questions? Get instant answers now!

References

Eisner, Robert. The Great Deficit Scares: The Federal Budget, Trade, and Social Security . New York: Priority Press Publications, 1997.

Weisman, Jonathan, and Ashley Parker. “Republicans Back Down, Ending Crisis Over Shutdown and Debt Limit.” The New York Times , October 16, 2013. http://www.nytimes.com/2013/10/17/us/congress-budget-debate.html.

Wessel, David. Red Ink: Inside the High-Stakes Politics of Federal Budget . New York: Crown Publishing Group, 2013.

Questions & Answers

high Dublin divino through Higginbotham
Shubham Reply
1.it allows producers to learn and invent 2.it allows agent to take advantage of economic scale 3.it allow agents to focus in areas of
oyebola Reply
can someone explain the motive of money to me?
Alemogho Reply
ask the question you don't know
ojo
opportunity cost
Sylvo
the motive of money is to pay for goods or services. it's also for transaction purposes bet it ordinary or unforseen
Silke
Money helps to reduce our scarcity problems. It can satisfy your wants to an extent
Okwori
How dose economics use science methods to explains it problems
Edmond Reply
according to Jhon Robinson the main problem of economics is what to produce? how to produce? whom to produce? economics tries to solve these problem scientifically by using its theories which are scientific in nature,basically micro and macro theories which just explain what the problem is...
Lavkesh
and now the solving techinique is also changed. only theories or its matematical +statistical version is not sufficient so the economist had developed Econometrics which includes economic theory+mathematical economics+statistics, for solving economic problem. This method treats economics as a pure
Lavkesh
..pure science so this technique is based on pure scientific methods.
Lavkesh
Economics is the scientific study of human behavior so there for science is used to solve economics problems using economics theories
Florence
economic is not higly subject of taminadu ...
Mutha
measurement of elasticity of demand
John Reply
Price elasticity of demand= Percentage change in quantity demanded/ Percentage change in price
Jale
For example, suppose that a 10 percent increase in the price of an ice-cream cone causes the amount of ice cream you buy to fall by 20 percent. We calculate your elasticity of demand as
Jale
Price elasticity of demand =20 percent /10 percent = 2
Jale
In this example, the elasticity is 2, reflecting that the change in the quantity demanded is proportionately twice as large as the change in the price.
Jale
what is economic
Samuel Reply
economics is a social science that studies the relationship of human behavior between ends and scare...
Lawrence
Why is economics as a subject is so important to human being?
austine
it's significant in study of managing available resources to satisfy human needs and wants
mohamed
economics is the science of wealth
Aamir
it is also said that it is the science of scarcity
Aamir
why study economic
Neo
Economic helps to meet our needs and wants nd to make choices.
Abraham
careers or jobs associated with economics
Neo
Economics is more than choices, scarcity, resources etc. It has a lot to do with psychology, social psychology. Understand motivation for consumer decisons.
TOM
okey
Neo
How does commercial banks create credit
Penda Reply
what is equilibrium price?
Stella Reply
happen when demand curve and supply curve meet
Enockz
intersection point of demand and supply curve
Sarjeel
the equilibrium price is that price at which the quantity demanded is equal to the quantity supplied... i.e the price at which what people want to buy is equal to what the sellers want to sell.
Che
what is difference between demand and quantity demand
Sarjeel
the price which is prevailing in the market ,it is the price at which the consumer is getting maximum satisfaction and the producer is getting maximum profit.
Rather
at equilibrium price demand for commodity is equal to supply of commodity..
Rather
dear sareel, quantity demand means the quantity of commodity which is demanded at a particular price e,g , your demand is for 4 oranges when price of orange is 5,, on the other hand demand means the whole quantity price relationship, quantity demand is shown on a particular point on demand curve,
Rather
sarjeel sbb, reply please...
Rather
what is elasticity of demand
Evans
what is Economics?
Ahmed
Economics can be defined as a social sciences that study human behavior as a relationship between end and scarce mean which have alternative use
Azeez
What is taxation
Azeez
economics is the study of scarcity
Suleiman
dear Suleiman how?
Enockz
economics is a subject matter that studies different economic activities as directed towards maximization of income at level of individual and maximization of social welfare at the level of society as a whole
Rather
economics studies us how to allocate scarce resources to full fill the maximum human wants as the resources have alternative uses..and r very scare to fullfill the human wants as the wants of humans are unlimited
Rather
demand is what a buyer is able and willing to buy at a specific price where by quantity demanded is amount of demand the buyer is able and willing to buy at a specific price.
daudi
thanks che..
Stella
how does commercial banks create credit
Penda
write models of Aggregate Supply?
abdi Reply
models of aggregate supply?
abdi
Then what's the law of elasticity?
austine
wat happen if money circulation failed to be controlled in any county?
Enockz Reply
the amount of money in circulation increases and cause aggregate demand to rise. Thus, hyperinflation.
Che
what's heteroscandacity
Crowther
price mechanism refers to the manner which price of goods and services affect the demand and supply of goods and services
Abaide
heteroscandacity: Is the circumstance where there is unequal variances across the observations.
Enockz
what is price mechanisms?
Che Reply
price mechanism refers to the manner which price of goods and services affect the demand and supply of goods and services
Abaide
what is demand
kabeer Reply
desire and ability to pay for a commodity is called demand.
Rather
i desire to become Prime Minister of India , is it demand ?please answer---
Rather
demand refers to the quantity demanded of a commodity that consumers are willing and able to buy at a particular price over a given period of time
Abigail
or the willingness power of a commoditythat is backed up by the ability to pay
Abigail
u r 100% right..
Rather
is ability to purchase a perticular goods at any price at a given time.
Neema
tanz Rather
Abigail
ur desire to become a prime minister of lndia is nt demand because u have nt made any efforts or willingness, it is called mere wish or lets say mere desire
Abigail
Thank you so much dear Abigail Mante for giving answer to my question..
Rather
U are welcome
Abigail
it's ok,dear..
Rather
The term ceteris paribus implies that
Oyelekan
Demand is the quantity demanded of a commodity at which a consumer is willing and able to purchase at various prices over a given period of time.
Suleman
ceteris parbus explains the law of demand,which states that at a higher price quantity demanded of a commodity is low and at a lower price quantity demanded of a commodity is high all other things being equal.
Abigail
U know right girl
Suleman
kk
Abigail
ceteris paribus is an economics terms used in situations where we considered other factors to remain unchanged
Ndeh
Thanks for the answer
Oyelekan
please how does disposable income affect demand?
Che
hell. somebody must tell me what is the meaning if cetrasparibus
Darling
plz. guys
Darling
the quantity of a commodity that a consumer ready willing and able to purchase at a particular price and in a particular period of time is known as demand
The
ceterusparibus means constant i,e,(other things do not change or other things remains constant)
Rather
wht
Bilal
right answer yawer saab
Sarjeel
things like what@Rather
Oyelekan
bilal sheikh why u has been written what
Sarjeel
e,g demand is determined by various factors like price of commodity, uses of good, expected changes in near future, nature of commodity , but when we learn price elasticity of demand , we keep other determinants of demand constant(i,e , we do not expect any change in price of good in near future,etc
Rather
i think u understand the term ceterus paribus..
Rather
bcz I can not understand
Bilal
what
Sarjeel
ok bro
Bilal
wht is other factors
Bilal
income of consumer, taste,
Sarjeel
Gold. Medlist in economics and. Lecturer of economics
HAZRAT
hello..what's are the factors affecting cross elasticity of demand.? at least five factors
Elzevery
The time it takes to get a product to market. That time limit has a name call "Just in Time."
William
thanks guys
kabeer
hey guys what is inelastic demand
Abaide
when there is no change in quantity demanded due to change in price then elasticity of demand is inelastic
Rather
Hi sucker how are you...
HAZRAT
thanks for the answer
Abaide
Any question about economics
HAZRAT
yes. what is the main cause of Heteroscedasticity
Abaide
hi
Habib
waht is elasticity of demand
Sarparah
elasticity of demand means change in quantity demanded divided by change in any of its determinent ,e,g , price ed= % change in quantity demanded/ % change in price.
Rather
elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in price of the commodity in question ,price of other related commodity n the consumers income
Abigail
yes
Kumako
ok
Abigail
guys what is monopoly
kabeer
A single seller in the market.
Tahir
what are the importance of economics
Eric Reply
what causes the demand curve to shift.
Stephen
other factors except price.it include test of a consumer fashen presence of substitute advatisment
Neema
factors other than price
Rather
Its helps to determine the price
Mavis
state three factors that affect demand and supply
VICENT Reply
1,price of the product 2,expectations in near future 3,uses of product
Rather
1.advertisement 2. expectation of future change in price 3.consumers income
Abigail
1.alternative products on market. 2.changes on price 3.consumer's expectations
Anusia
what is cheque
adedayo Reply
resources of exchanging of money to any where
Dinesh
it is a writen order to a bank to pay a specific sum of money to a person
Richard

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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