ECON-1007EL Chapter Notes - Chapter 32: Government Budget Balance, Deficit Spending, Real Interest Rate
Chapter 32: Government Debt and Deficits
Definitions
Debt-Service Payments
Payments that represent the interest owed on a current stock of debt
Budget Deficit
Any shortfall of current revenue below current expenditure
Government Debt
The outstanding stock of financial liabilities for the government, equal to the
accumulation of past budget deficits
Budget Surplus
Any excess of current revenue over current expenditure
Primary Budget Deficit
The difference between the government’s overall budget deficit and its debt-
service payments
Budget Deficit
Function
A relationship that plots, for a given fiscal policy, the government’s budget
deficit as a function of the level of real GDP
Cyclically Adjusted
Deficit (CAD)
An estimate of what the government budget deficit would be if real GDP
were equal to Y*; sometimes called a structural deficit.
Crowding Out
The offsetting reduction in private expenditure caused by the rise in interest
rates that follows an expansionary fiscal policy
Equations
Key Points
• The government’s annual budget deficit is the excess of expenditure over tax revenues in
a given year. It is also equal to the change in the stock of government debt during the
year.
• A budget deficit increases the stock of government debt; a budget surplus reduces it.
• The primary budget surplus or deficit shows the extent to which current tax revenues can
cover the government’s current program spending; it is equal to the overall budget deficit
minus debt-service payments.
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