econchapter18shortessay Essay

285 WordsSep 26, 20082 Pages
A budget deficit is the excess of government expenditures over receipts. A budget surplus is an excess of government revenues over expenditures. The public debt is the total accumulation of the government’s deficits over time and consists of Treasury bills, Treasury notes, Treasury bonds, and U.S. saving bonds. Historically, the growth of the public debt has resulted from deficit financing of wars, revenue declines during recessions, and lack of fiscal discipline by elected leaders. The concern that a large public debt may bankrupt the government is a false worry because the debt needs only be refinanced rather than refunded and the Federal government has the power to increase taxes to make interest payments on the debt. The crowding-out effect aside, the public debt is not a vehicle for shifting economic burdens to future generations. In general, Americans inherit not only the public debt but also the U.S. securities that finance the debt. More substantive problems associated with public debt include payment of interest on the debt may increase income inequality. Interest payments on the debt require higher taxes, which may impair incentives. Paying interest or principal on the portion of the debt held by foreigners means a transfer of real output to abroad. Government borrowing to refinance or pay interest on the debt may increase interest rates and crowd out private investment spending, leaving future generations with a smaller stock of capital than they would have otherwise. The increase in investment in public capital that may result from debt financing may partly or wholly offset the crowding-out effect of the public debt on private investment. Also, the added public investment may stimulate private investment, if the two are

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