Government budget balance
The government budget balance is the difference between what a state collects and what it spends. In 2011, the U.S. federal deficit reached approximately 8.6% of gross domestic product. This figure represents a flow variable measured over one year rather than a stock accumulated at a specific moment. A positive balance indicates a surplus while a negative balance signals a deficit. Governments using accrual accounting exclude capital asset expenditures from this calculation to focus on current operations.
Financial journalist Martin Wolf analyzed how private sector shifts forced government deficits in the early 2000s. Between the third quarter of 2007 and the second quarter of 2009, the private sector shifted toward surplus by 11.2% of GDP. This massive move into saving occurred without major fiscal policy changes. Economist Paul Krugman explained that housing bubbles ended and business investment slumped during this period. The sum of surpluses or deficits across three sectors must equal zero by definition. British economist Wynne Godley developed the framework used to analyze these national economic balances today.
A cyclical deficit appears when unemployment rises and tax revenues fall during economic downturns. At the peak of the cycle, low unemployment increases revenue and decreases social security spending. The structural deficit remains constant regardless of where the economy stands within its business cycle. Economists Alan Auerbach and Laurence Kotlikoff proposed measuring the fiscal gap over very long terms. This measure includes promised future commitments like health and retirement spending against planned tax revenues. Some economists criticize the distinction because measuring the business cycle proves too difficult for accurate analysis.
Before bonds existed, governments relied on loans from private investors like the Rothschild dynasty in the late 18th century. Large long-term loans carried high interest rates due to lender risk. Governments began issuing bearer bonds payable to whoever held them so lenders could sell debt easily. Examples include British Consols and American Treasury bill bonds. These innovations reduced risk for lenders allowing governments to offer lower interest rates. Private financiers had amassed enough capital to provide loans once governments stopped printing money which caused inflation.
Professor William Vickrey won the 1996 Nobel Memorial Prize in Economic Sciences for work on stimulating economies through deficits. Ricardian equivalence suggests households save now to offset future taxes required to pay current public deficits. If true, this behavior prevents tax cuts from stimulating the economy effectively. Empirical evidence on these effects remains mixed according to available data. The crowding-out hypothesis argues that government borrowing draws resources away from private investment. Higher interest rates make private investment more expensive and reduce its usage during deficit periods.
Election years show a tendency called political business cycle where politicians spend more before voting occurs. Political instability correlates negatively with budget balance meaning less stability leads to less balanced budgets. Left-wing parties generally favor higher expenditure while right-wing parties prefer lower spending levels. Single party governments often enforce new laws more actively than coalition types. The Budget Control Act of 2011 established caps on discretionary spending to reduce the federal deficit by $2.1 trillion over ten years. These measures led to reductions in defense and domestic program funding across multiple agencies.
The Tax Cuts and Jobs Act of 2017 implemented significant tax cuts for individuals and corporations. Proponents argued it would stimulate growth while opponents raised concerns about the federal deficit impact. The Congressional Budget Act of 1974 established an internal process for Congress to formulate annual plans. Pay-as-you-go requirements mandate that new legislation must be deficit-neutral over specified periods. During the Greek debt crisis, a haircut cancelled part of the debt in 2011 but caused banking crises elsewhere. Cypriot banks lost 5% of their assets during this specific financial restructuring event.
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Common questions
What is the government budget balance?
The government budget balance is the difference between what a state collects and what it spends. A positive balance indicates a surplus while a negative balance signals a deficit.
When did the U.S. federal deficit reach 8.6% of gross domestic product?
In 2011, the U.S. federal deficit reached approximately 8.6% of gross domestic product. This figure represents a flow variable measured over one year rather than a stock accumulated at a specific moment.
Who developed the framework used to analyze national economic balances today?
British economist Wynne Godley developed the framework used to analyze these national economic balances today. Financial journalist Martin Wolf analyzed how private sector shifts forced government deficits in the early 2000s using this approach.
How does the Budget Control Act of 2011 affect discretionary spending?
The Budget Control Act of 2011 established caps on discretionary spending to reduce the federal deficit by $2.1 trillion over ten years. These measures led to reductions in defense and domestic program funding across multiple agencies.
What happened to Cypriot banks during the Greek debt crisis restructuring event?
During the Greek debt crisis, a haircut cancelled part of the debt in 2011 but caused banking crises elsewhere. Cypriot banks lost 5% of their assets during this specific financial restructuring event.