 |  Macroeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley L. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson University
Deficits, Surpluses, and the Public Debt
Chapter HighlightsCHAPTER 11- A budget deficit is the excess of government expenditures over its receipts. A budget surplus is an excess
of government revenues over its expenditures. The public debt is the total accumulation of the government's
deficits (minus surpluses) over time and consists of Treasury bills, Treasury notes, Treasury bonds, and
Canada savings bonds.
- Among the various budget philosophies are the annually balanced budget, the cyclically balanced budget,
and functional finance. The basic problem with an annually balanced budget is that it promotes swings in
the business cycle rather than counters them. Similarly, it may be difficult to balance the budget over the
course of the business cycle if upswings and downswings are not of roughly comparable magnitude. Functional
finance is the view that the primary purpose of federal finance is to stabilize the economy, and that
problems associated with consequent deficits or surpluses are of secondary importance.
- Historically, the growth of the public debt has resulted from revenue declines during recessions, deficit
financing of wars, and lack of political will to reduce government spending.
- In 2000 the Canadian public debt was $650 billion, or $20,170 per person. The public (here including chartered
banks and provincial and municipal governments) holds 72 percent of that debt, while the Bank of
Canada holds 8 percent, and foreigners 20 percent. In the 1980s and early 1990s, the public debt increased
sharply as a percentage of GDP. In more recent years, that percentage has substantially declined. Interest
payments as a percentage of GDP were about 4 percent in 2000.
- The concern that a large public debt may bankrupt the government is a false worry because (a) the debt need
only be refinanced rather than refunded, and (b) the federal government has the power to increase taxes if
necessary 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, Canadians inherit not only the public debt (a liability), but also the Canadian securities
(an asset) that finance the debt and the infrastructure that the debt bought.
- More substantive problems associated with public debt include the following: (a) Payment of interest on the
debt may increase income inequality. (b) Interest payments on the debt require higher taxes, which may
impair incentives. (c) Paying interest or principal on the portion of the debt held by foreigners means a transfer
of real output to abroad. (d) 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 had 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 complements.
- The large federal budget deficits of the 1980s and early 1990s led the federal government to increase tax
rates and limit government spending. As a result of these policies, along with a rapid economic expansion,
the deficits dwindled to $13 billion in 1997. Budget surpluses occurred in 1998, 1999, and 2000.
- The actual and projected budget surpluses set off a policy debate over what to do with them. The main
options are (a) paying down the public debt, (b) reducing tax rates or eliminate some taxes altogether, and
(c) increasing government spending.
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2002 McGraw-Hill Higher Education