Macroeconomics in Context by Neva Goodwin Jonathan Harris Julie A. Nelson Brian Roach & Mariano Torras

Author:Neva Goodwin, Jonathan Harris, Julie A. Nelson, Brian Roach & Mariano Torras
Language: eng
Format: epub
ISBN: 9781317465737
Publisher: Routledge

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Showing the government’s budget deficit as a percentage of nominal GDP is a simple way to correct for the effects of both inflation and the ability of the economy to handle the deficit. The larger the economy—as measured by GDP—the easier it is to manage a given deficit, since both the fiscal and budgetary impacts of the deficit will be relatively smaller compared to the size of the economy. A bigger economy means that people will have higher incomes and a larger flow of savings is likely to be available to purchase more government bonds, making it easier for the government to borrow.

State and local governments are generally required to separate their current spending and capital budgets. Current spending must be paid for out of current taxes, but money can be borrowed for investment (“capital”) projects such as new schools, bridges, and transit systems. The federal budget, however, makes no such distinction between current and capital spending. In fact, the federal government has considerably more flexibility than state and local governments in the conduct of budget operations. A decisive factor in the difference is that the federal government is uniquely empowered to conduct deficit spending and to finance spending through expansion of the money supply (as we will see in Chapter 12), while the states and municipalities have no such power. We return to this point in later chapters.

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