Budget Deficits and Debt

Psychological Effects

1. Cut spending too much (military/ social programs) 2. Consumer confidence in government takes a hit (may decrease government spending, burden future generation)

US Budget Trend- Trend II (1990s)

1. Deficit Fell// 1998 started budget surpluses a. Growing economy, increased tax rates, spending interest rates

Treasury bonds considered safe financial investments

1. Foundation of global economy 2. Want US to not have too much debt, but not payback all debt either 3. US never defaulted on bond payments

US Budget Trend III (2000s-now)

1. Increased deficit (2002-2010 recession got worse) -but fought recession and then deficit shrank

Benefits of deficit

1. Lesser of evils 2. Increasing/ tolerating deficit stops recession from worsening 3. Finance socially necessary spending (ex: wartime)

Causes of Budget deficit fluctuations

1. Tax increase deficits 2. Purposeful changes in spending, transfer payments, taxes, new laws and tax rate changes 3. Automatic changes of business cycle (income tax revenue drops during recession) 4. Spending on pre-existing social programs or tax deduction programs 5. Any change in tax revenue

US Budget Trends- Trend I (1980s)

1. Trend I (1980s) Reagan and bush I0 deficit and national debt increase 2. Cut taxes and boasted military spending

Deficit vs debt

Debt= total amount borrowed Deficit= this year's debt

What effect does the deficit have on national debt?

It increases it

Problems with Deficits

National bankruptcy/ currency cash 1. What if investors get scared and don't want to buy bonds or pull out existing money 2. Or demand higher interest rates 3. Artificial bankruptcy meaning we hit the debt ceiling that congress put in place 4. May decrease government spending

What is a budget deficit?

When government spending is larger than tax revenue (Need extra money to fill 'financing gap)