Government deficits, surpluses and the balance of trade

Outlays

TODO

Receipts

TODO

Budget

Budgets are always designed for a specific period of time. Budgets for ongoing operations like governments or businesses are typically for one year.

Surplus

The only way for a government to reduce its debt is to run a budget surplus, to take in more money than it spends. The surplus must then be used to pay off maturing debt (bonds, notes, etc.) rather than replacing them (rolling them over) with more debt.

Since 1950 there have been only four years that the U.S. government has run a surplus. For every other year, the federal debt has grown.

Deficits

Outlays are set off against receipts, and the result is a deficit.

Fiscal year of the government

For various reasons, the fiscal years of governments and businesses rarely coincide with calendar years. The U.S. government’s fiscal year starts October 1 and ends on September 30.

National debt

If we look at The U.S. Balance of Payments, when the net result of both the Current Account and the Capital Account yields more credits than debits, the country is said to have a surplus in its balance of payments. When there are more debits than credits, the country has a deficit in the balance of payments. It is in the category of Official Settlement that any deficit is offset by official liabilities of the government or that surpluses are retained as U.S. official reserve assets. Deficits are usually offset by currency transfer transactions and obligations of official foreign bodies such as central banks.

The monthly calculations of deficits or averages are simply interim reports. The results accumulate until the end of that fiscal year, at which time the government starts on a new fiscal year, and the deficit from the past fiscal year is added to the national debt.

Living with deficits

One of the problems of maintaining a deficit is that it costs money. Debts must be financed by borrowings, and to borrow one must pay interest.

As explained in the chapter on government securities, the government borrows by issuing bonds, notes, and bills. The interest that must be paid to investors who purchase these instruments is the cost, to the government, of these borrowings.

The national debt is thus the sum of all the money the government has borrowed (and which is still outstanding) to finance budget deficits. Another way of looking at it is as the accumulation of all the past decisions of the government to borrow in order to pay debts rather than to raise taxes.

Deficit financing - that is, continuing to pay for government programs by increased amounts of debt - has become a way of life in the United States. It is hard to reverse this trend when many people strongly believe in what the government is spending the money for: defense, health care, highways, school lunches. It is obviously a matter of fiscal priorities. And government spending is not the only reason for a deficit budget. Economic slumps also contribute because revenues fall at the very same time that the need for unemployment benefits, food stamps, and other social programs increases.

Many observers and experts believe that a chronic deficit combined with a rising national debt is inflationary and adds a burden to future generations. On the other hand, some economists argue that the circumstances of the debt must be taken into consideration. For instance, government spending to get the country out of a prolonged economic depression can be worthwhile if it results in full employment and economic prosperity. Then incurred debt can be paid back relatively painlessly.

However, to many people, this is a no-win situation. The country either goes on paying huge amounts of interest year upon year, or it raises even larger amounts in taxes to pay off the principal. The ideal solution is increased prosperity, a period of full employment when the government runs a surplus and can assign the extra funds raised to reducing the national debt.

In considering methods by which the national debt can be reduced, it is interesting to take a closer look at where the interest that is generated by this debt goes. A large chunk of interest payments from government securities, about 20%, goes to other government agencies like the social security system. A bit less goes to the Federal Reserve banks which, by law, must return 90% of their profits to the Treasury. Another large chunk goes to U.S. bond, note, and bill holders. So in these three cases we are simply taking money out of one pocket and putting it into another. Perhaps, this makes the huge interest payments a bit less painful.

Real losses occur when payments are made to security holders outside the country. Because of prolonged high interest rates and the perception of the United States as a safe haven for investment, the proportion of foreign ownership of U.S. government securities has risen to about 25%. It has never been this high in the past, and the recent falling interest rates in this country may bring about a repatriation of foreign investments by investors outside the United States.

Another consideration that may help put the national debt in perspective is that it has grown at a slower pace than the economy in general, and even at its present 3% of the GNP, it is still lower than that of many leading industrial nations.

A vital and still unanswered question is whether deficit spending creates inflation. If so, then deficit spending cannot bring the prosperity necessary to provide a surplus budget which will, in turn, make it possible to lower the national debt. Businesses, saddled with high interest rates on their borrowings, simply cannot operate at full capacity.

One thing most economists do seem to agree on is that government borrowing during times of full employment and economic strength is counterproductive, since there will be no “better times” during which a budget surplus can be used to reduce the amounts borrowed. Clearly, to run a deficit budget in periods of economic prosperity is simply to put off the time when taxes must be raised to retire newly created debt.