What you will learn
in this Module:
296 section 6 Inflation, Unemployment, and Stabilization Policies
- Why governments calculate
the cyclically adjusted
budget balance - Why a large public debt may
be a cause for concern - Why implicit liabilities of the
government are also a cause
for concern
Module 30
Long-run Implications
of Fiscal Policy: Deficits
and the Public Debt
In Module 20 we discussed how discretionary fiscal policy can be used to stabilize the
economy in the short run. During a recession, an expansionary fiscal policy—raising
government spending, lowering taxes, or both—can be used to shift the aggregate de-
mand curve to the right. And when there are inflationary pressures in the economy, a
contractionary fiscal policy—lowering government spending, raising taxes, or both—
can be used to shift the aggregate demand curve to the left. But how do these policies
affect the economy over a longer period of time? In this module we will look at some of
the long-term effects of fiscal policy, including budget balance, debt, and liabilities.The Budget Balance
Headlines about the government’s budget tend to focus on just one point: whether the
government is running a budget surplus or a budget deficit and, in either case, how big.
People usually think of surpluses as good: when the federal government ran a record
surplus in 2000, many people regarded it as a cause for celebration. Conversely, people
usually think of deficits as bad: when the Congressional Budget Office projected a
record federal deficit for 2009, many people regarded it as a cause for concern.
How do surpluses and deficits fit into the analysis of fiscal policy? Are deficits ever a
good thing and surpluses a bad thing? To answer those questions, let’s look at the
causes and consequences of surpluses and deficits.The Budget Balance as a Measure of Fiscal Policy
What do we mean by surpluses and deficits? The budget balance, which we have previ-
ously defined, is the difference between the government’s tax revenue and its spending,
both on goods and services and on government transfers, in a given year. That is, the
budget balance—savings by government—is defined by Equation 30-1:
(30-1) SGovernment=T−G−TR