Question

The budget surplus is defined as taxes less transfers and government purchases, T − G, where T is net taxation (taxes less transfers) and G is government purchases. If the government has collected more than it has spent, the term T − G is positive and the budget is in surplus. If T − G < 0 then the budget is in deficit. Recall that T and G are flows (as is GDP). The budget deficit or surplus is measured in currency, e.g., dollars, and is often expressed as a percentage of Gross Domestic Product, (T − G)/Y × 100. Find FRED series for the U.S. Federal government budget surplus or deficit measured in (millions of) dollars and measured as a percent of GDP. Focus on the period since 1950. (a) When was the most recent period of surplus? (b) Under what circumstances (hint: shading) does GDP move towards deficit? What is a possible explanation of this relationship? (c) Why is expressing the deficit as a percent of GDP a useful way to describe the deficit? Compare the currency and percent of GDP measures of the deficit for 1986 and 2004.

Answer 1

The FRED series for the US Federal government budget surplus or deficit as a percentage of GDP is shown here from the year 1950.

As noted from the graph, the Highest was recorded during the Year 2000, when the budget surplus s a percentage of GDP peaked at 2.304.

a) The most recent period of surplus was from FISCAL YEAR 1998- 2001.

b) when the T-G/Y ratio, where Y= GDP, becomes more negative in magnitude, the the economy moves towards deficit or one can say the GDP is running towards deficit. This happens when the government expenditures on its operations and investments exceeds far more than what it earns through its tax receipts or other sources of revenues.

note when the economy is growing that is GDP growth rate is positive and relatively higher, the government's tax income rises and also the need to spend on more social security or safety programs decreases. Also, as the economy reaches more to its Full- Employment level and hence GDP is quite high the debt to GDP ratio falls, whereas when the Economy is facing any downturn as such the GDP is falling , and simultaneously government spending to generate demand and investment rises, whereas ability to pay of workers that is tax receipts fall , thus debt - to- GDP ratio soars high .

c) When one needs to compare the deficit for whether its healthy or not it should obviously compare with the country's ability to pay back, GDP is the measure of the ability to pay back. Expressing the deficit as a percentage of GDP provides a compact picture of how the Economy is functioning. A quick look into this debt to GDP ratio shall yield how much the the government is spending in excess of what it is earning . Since, any excess in the expenditures of the government creates value in the economy as well imposes a liability over it, it often does not give us a very unclear picture of the impact of expenditures on the growth in any given fiscal year. If both the government grows faster than its spending this debt to GDP ratio goes down showing economic growth . This means it might happen that for any two consecutive FY's deficit is rising , However if deficit to GDP ratio falls , the economy has progressed. Hence this expression yields a broader picture.

The deficits as a percentage of GDP were -4.831 in 1986 and -3.379 in 2004. The deficit value in currency were $221 billion in 1986 and $431 billion in 2004. While the primary cause for which the deficits were incurred on the Economy during 1986 was Tax Cuts , it was due to the ongoing Iraq war during 2004, deficits were incurred . Moreover the increase in deficits as compared to the previous FY in 1986 was 297 millions while for FY 2004 it was 596 millions