Budget Deficits, National Saving, and Interest Rates

Abstract

Brookings Papers on Economic Activity, 2:2004 3. Domestic investment represents the accumulation of assets in a country by both its own residents and foreigners. Net foreign investment is the accumulation of assets abroad by residents less the accumulation of assets in the home country by foreigners. The sum of the two is just the accumulation of assets, by residents, in the home country and abroad. This sum must equal national saving. 104 Brookings Papers on Economic Activity, 2:2004 5. The unified budget is not recorded entirely on a cash-flow basis, and so the unified deficit does not precisely match the increase in debt held by the public. For example, only the subsidy cost of direct loan transactions is now recorded in the unified budget. The government must, however, finance the full value of the loan. This factor causes the unified budget deficit to be smaller than the increase in debt held by the public. 10. CBO, "The Economic and Budget Outlook," January 2004. 11. See Auerbach and others (2003) for an extended discussion of these issues. 12. See Gale and Orszag (2003b) for further discussion of the expiring provisions, and Gale and Orszag (2004a) on the effects of making the tax cuts permanent. 13. See Burman, Gale, and Rohaly (2003) for discussion of AMT projections and trends. 14. Another concern is that the baseline holds real discretionary spending constant over time. In a growing economy with an expanding population and evolving security needs, this assumption is not credible. But the September 2004 projections contain offsetting biases for discretionary spending that roughly cancel out. In particular, the baseline includes the recent supplemental spending authority for military expenditures in Iraq, which is unlikely to persist for an entire decade. Removing the supplemental and adjusting the spending level for population results in a ten-year outlay total that is about the same as that in the baseline, and so we simply adopt the official baseline figures for discretionary spending. 16. See Auerbach (1994). Over an infinite planning horizon, the requirement is equivalent to assuming that the debt-GDP ratio does not explode. Alternatively, the adjustments set the present value of all future primary surpluses equal to the current value of the national debt, where the primary surplus is the difference between revenue and noninterest expenditure. 17. Auerbach, Gale, and Orszag (2004). In perhaps more familiar terms, the primary deficit would be 4.

The Impact of Taxes on the Consumption to Income Ratio

“…Their models yielded a very wide range of estimates, where a statistically significant portion of the tax cut is saved and, of course, a statistically significant portion is consumed. When consumption was measured as a ratio to net income, the decrease in taxes could be associated with a proportional and almost identical increase in consumption as well as with a very small increase (Gale and Orszag 2004). These ambiguous results are only partly compatible with the findings of this paper, as a very huge range of possible consumption responses on tax or income changes indicate that everything is possible -consumers may be forward looking, but they also may be not.…”

Fiscal Deficits and Stock Prices in India: Empirical Evidence

“…Some researchers, particularly from developed economies, are of the view that large and persistent fiscal deficits can significantly depress stock prices [5,[14][15][16][17][18]. Geske and Roll [14] used a simple linear regression model and found that the expected directional impact of budget deficits on stock return should be negative.…”

The Financial Services Industry

“…What most can agree upon, however, is that this imbalance will not continue forever. Increasing debt and deficit spending relative to GDP has been shown to increase interest rates (Gale, 2004 andEngen/Hubbard, 2004). "The real question is whether the large-scale borrowing is sustainable."…”