Question

Suppose the government increases government expenditures in the future period, makes no changes to current taxes, and will not change its future government expenditures. Use the intertemporal government budget constraint and the intertemporal consumer’s budget constraint to describe the impact on consumers’ lifetime income.

Answer 1

To answer this question, we have to first understand the terms intertemporal govn.budget constraint and the intertemporal consumer's budget constraint.

Intertemporal Government Budget Constraint

Tax and spending decisions at different dates are linked. Although governments can borrow or lend in a given year, a government’s total spending over time must be matched with revenues. When a government runs a deficit, it typically borrows to finance it. It borrows by issuing more government bonds.

To express the intertemporal budget constraint, we introduce a measure of the deficit called the primary deficit. The primary deficit is the difference between government outlays, excluding interest payments on the debt, and government revenues. The primary surplus is minus the primary deficit and is the difference between government revenues and government outlays, excluding interest payments on the debt.

The intertemporal budget constraint says that if a government has some existing debt, it must run surpluses in the future so that it can ultimately pay off that debt. Specifically, it is the requirement that

current debt outstanding = discounted present value of future primary surpluses.

This condition means that the debt outstanding today must be offset by primary budget surpluses in the future. Because we are adding together flows in the future, we have to use the tool of discounted present value. If, for example, the current stock of debt is zero, then the intertemporal budget constraint says that the discounted present value of future primary surpluses must equal zero.

The stock of debt is linked directly to the government budget deficit. As we noted earlier, when a government runs a budget deficit, it finances the deficit by issuing new debt. The deficit is a flow that is matched by a change in the stock of government debt:

change in government debt (in given year) = deficit (in given year).

The stock of debt in a given year is equal to the deficit over the previous year plus the stock of debt from the start of the previous year. If there is a government surplus, then the change in the debt is a negative number, so the debt decreases. The total government debt is simply the accumulation of all the previous years’ deficits.

When a government borrows, it must pay interest on its debt. These interest payments are counted as part of the deficit (they are included in transfers). If a government wants to balance the budget, then government spending must actually be less than the amount government receives in the form of net taxes (excluding interest).

This presentation of the tool neglects one detail. There is another way in which a government can fund its deficit. As well as issuing government debt, it can print money. More precisely, then, every year,

change in government debt = deficit − change in money supply.

Written this way, the equation tells us that the part of the deficit that is not financed by printing money results in an increase in the government debt.

The Intertemporal Budget Constraint:

Rational individuals always prefer to increase the quantity or quality of the goods and services they consume. However, most people cannot consume as much as they like due to limited income. In other words, people face a budget constraint, which sets a limit on how much they can spend.

Since consumption decisions are taken over a period of time, consumers face intertemporal budget constraint, which shows how much income is available for consumption now and in the future. This constraint reflects a consumer’s decision on how much to consume today and how much to save for the future.

So,as asked in the question,if govn.doesnt impose any taxes and increases its future epenses then consumers will be able to save for their future. This can be stated by the above explaination done on intertemporal govn.budget constraint.