Budget Analysis (ch 4) A. Government Budgeting Government debt refers to __________________________________________________________. - stock variable A government deficit refers to _______________________________________________________.

- flow variable 1. The Budget Deficit in Recent Years (1965 - present) Late 1960s through 1992 Government expenditures were: - due to Tax revenues were: - due to Early 1990s through 2000 Government expenditures were: - due to Tax revenues were: - due to Early 2000s through present Government expenditures were: - due to Tax revenues were: - due to

2. The Federal Budget Process The President¶s budget is due to Congress by ____________________________. It includes Congress works out that year¶s Congressional Budget Resolution and sends it to the President for a signature by ________________________.

There are 2 types of Federal spending. Entitlement spending which refers to:

Discretionary spending which refers to: 1

The budget process sets _____________________ spending only. The appropriations committees take the total amount of discretionary spending available in the Budget Resolution and divide it into ________ allocations, one for each of the Congressional subcommittees. All ___ appropriations bills must be passed by both Houses of Congress no later than ______________. The bills are then sent to the President. If Congress wishes to change the entitlement spending, it must:

Efforts to Control the Deficit 1985 Balanced Budget and Emergency Control Act (aka Gramm-Rudman-Hollings): Deficit target of ______ in 1986 and decreasing by _______ each year until the budget is balanced in the year _____. Trigger provision:


1990 Budget Enforcement Act: Instead of targeting a specific __________, the BEA restrains ___________ in government spending. Set caps:



3. Budget Policies and Deficits at the State Level Every state except for _________________________ has a balanced budget requirement that forces it to balance its budget each year. 2/3s of states have Ex Post BBRs which means they must:

1/3 of states have Ex Ante BBRs which means they must:


Studies show that _________ BBRs are more effective at restraining states from running deficits.

B. Approaches for Measuring the Budgetary Position of the Government 1. Real vs Nominal

2. The Standardized Deficit (aka Structural Budget Deficit) Reflects:

It is computed by the CBO in two steps: Step 1: To account for __________________________ on the deficit, the CBO computes a cyclically adjusted budget deficit. - start with a baseline projection of _______________ and ______________ - estimate how much revenue loss and spending increase are due to the economy¶s __________________________________________________________ Step 2: Account for ___________________________ factors like:

3. Cash vs Capital Accounting Cash Accounting measures the deficit as the difference between:

Capital Accounting takes into account:

Problems with Capital Budgeting:

4. Static vs Dynamic Scoring Static scoring: Critics say:

Dynamic scoring: Difficulty: 3

C. Do current debts and deficits mean anything? 1. Present Discounted Value

2. Alternative Measures of Long-Run Government Budgets The basic idea is to correctly measure the intertemporal budget constraint of the government. - compare the total PDV of the government¶s obligations to the total PDV of its revenues Generational Accounting is designed to assess:

Long-run Fiscal Imbalance is designed to answer the question:

Problems with these alternative measures:

3. What does the US government do?

D. Why do we care about the Government¶s Fiscal Position? For 2 reasons: efficiency and equity

1. Short-run vs Long-run Effects on the Macroeconomy Short-run stabilization refers to:

Automatic stabilization:

Discretionary stabilization: 4

2. Savings and Economic Growth More Capital, More Growth

More Savings, More Capital

Capital Market diagram:

3. Federal Budget, Interest Rates, and Economic Growth Crowding Out

International Capital Markets

Ricardian Equivalence



4. Intergenerational Equity


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