Section 3 Budget Deficits and the National Debt
Preview
Objectives
After studying this section you will be able to:
- Explain the importance of balancing the budget.
- Analyze how budget deficits add to the national debt.
- Summarize the problems caused by the national debt.
- Identify how a government can reduce budget deficits and the national debt.
Section Focus
Fiscal policy decisions can lead the federal government to spend more money than it brings in, causing budget deficits and a national debt. Economists, lawmakers, and citizens debate whether the benefits of government spending outweigh the costs of debt.
Key Terms
- balanced budget
- budget surplus
- budget deficit
- hyperinflation
- Treasury bill
- Treasury note
- Treasury bond
- national debt
- crowding-out effect
As you have learned, the federal government uses fiscal policy—taxing and spending—to make changes in the economy. Fiscal policy is a powerful tool. It can be used to help stimulate demand, increase production, create jobs, increase GDP, avoid recessions, control inflation, and stabilize economic growth. As you'll read in this section, raising government spending can lead to yearly budget deficits that add up to an enormous debt. The costs of this debt must be measured against the benefits of higher government spending.
Balancing the Budget
The basic tool of fiscal policy is the federal budget. It is made up of two fundamental parts: revenue (taxes) and expenditures (spending programs). When the federal government's revenues equal its expenditures in any particular year, the federal government has a balanced budget. There is the same amount of money going into and coming out of the Treasury.
In reality, the federal budget is almost never balanced. Usually, it is either running a surplus or a deficit. A budget surplus occurs in any year when revenues exceed expenditures. In other words, there is more money going into the Treasury than coming out of it. A budget deficit occurs in any year when expenditures exceed revenues. In other words, there is more money coming out of the Treasury than going into it.
In the early 2000s, the national debt, the sum of all the money owed by the federal government, seemed to be spiraling out of control.
Table of Contents