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Chapter 15 budget deficits and public debt

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

confiscation	IOUs the repayment of which entails no loss of purchasing power.
Ricardian Equivalence	The best way to finance government outlays depends on the least costly policies available.
uncontrollable spending	Long term programs like Social Security.
crowding-out hypothesis	Repaying old debts by taking out new loans.
government budget constraint	The cumulation of all budget deficits through history.
external debt	Eminent domain and the military draft are examples.
roll over	The idea that governmental growth entails opportunity costs.
internal debt	G = T + ∆B + ∆MB.
functional finance	How government debt is financed is irrelevant.
national debt	Purchasing power is lost when this is repaid.

2 Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Budget deficits and public debt

Chapter Objectives

After reading and studying this chapter you should be able to describe problems encountered in balancing the budget; discuss the “crowding out” hypothesis; differentiate between government and private budget constraints; and evaluate the impact of national debt on future generations.

Chapter Review: Key Points

1. The budget deficit equals annual government outlays minus receipts. The public debt is total federal indebtedness resulting from current and past deficits.

2. Balancing the budget annually might result in incorrect fiscal actions to combat either inflation or recession. Some have suggested balancing the budget over the business cycle. This would entail running deficits during recessions and surpluses over the boom. Unfortunately, business cycles are not symmetric, and the budget may not be easy to balance over the cycle without hampering prosperity. Advocates of functional finance believe that the size of the public debt is unimportant. They suggest that we ignore the problem of balancing the budget and focus on balancing the economy instead.

3. The federal government can finance public spending by collecting taxes (T), creating additional monetary base (∆MB), selling government securities (∆B), or through confiscation. All of these techniques are drains on gross private saving (production minus private consumption) that can crowd out private economic activities. The notion called Ricardian equivalence suggests that whether government spending is financed by taxes or borrowing is irrelevant.

4. The crowding-out hypothesis states that increases in government purchases inevitably reduces private consumption, investment, or leisure.

5. Federal deficits can be financed by increasing domestic saving, securing the savings of foreigners, or by reducing domestic investment or exports. All else constant, a growing budget deficit will cause growth of a trade deficit.

6. Some government spending is uncontrollable (now estimated at 75%). These programs are long-range or are committed by law each and every year. Reducing such outlays may be impossible.

7. A major difference between private and public debt is that private debt is owed to persons external to the issuing institution, while the bulk of public debt is internal, being owed to ourselves. Private debt has grown faster than public debt since the 1950s and is currently over twice as large.

8. The real burden of the national debt stems from the federal government “crowding out” private investment as it drives interest rates up when competing with the private sector for loanable funds. As a result future generations may inherit a smaller capital stock and a smaller production-possibilities frontier.

9. Among the major benefits of the public debt are its use as a stabilization instrument and as a risk-free asset for savers.

3 Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Пролонгация срока кредита путём выпуска новых долговых обязательств; run a deficit ; secure resources размер государственного долга; surrender one’s assets брать новые ссуды;

total federal indebtedness; внешнеторговый дефицит; indebtedness; бремя национального долга; цикл деловой активности; capital stock; взимать налоги; противодействовать экономическому спаду; compete for loanable funds; cover budget deficit; гипотеза о вытеснении\замещении частных инвестиций государственными расходами; crucial consideration; current and past deficits; deep recession; внутренние капиталовложения; be estimated at 75%; внутренние\национальные сбережения; drain; advocates of functional finance; при прочих постоянных условиях; annually; балансировать бюджет в течение экономического цикла; be drains on gross private saving; быть в два раза больше; impact of national debt; быстрый экономический подъём; borrowing against current assets; заем денег под ожидаемый доход; borrowing; ограничение на величину капиталовложений; be estimated at 75%; превышение правительственных расходов над доходами; bulk; drive interest rates up; суверенное право государства отчуждать собственность; inevitably; наталкиваться на трудности; entail loss of purchasing power; устанавливать стоимость\определять качество; внешняя задолженность; fiscal actions; сосредоточить внимание; введенное правительством бюджетное ограничение; внутренняя задолженность; долговая расписка; не относящийся к вопросу; issue bonds; эмиссионное учреждение; least costly policies available; loanable funds; долгосрочная программа; be owed to ourselves; призыв на военную службу; private economic activities; долг частных лиц или корпораций (негосударственная задолженность); production-possibilities frontier; правительственные\государственные издержки\расходы; government outlays; государственные ценные бумаги; gross private saving; препятствовать процветанию; idle resources; расходы на общественные нужды; ignore the problem; покупательная способность денег\платёжеспособный спрос; receipts; погашать старый долг; эквивалентность по Риккардо; risk-free asset.