07.06.2023 Budget Deficits and Debt#

Government Budget#

img

  • Budget Deficit: \(\Delta B = G + iB - T\)

  • Primary Deficit: \(G-T\)

  • Budget Constraint: \(T + \Delta B = G+iB\)

Financing Options

  • Bonds Issuing: \(\Delta B \uparrow\)

  • Money Printing: \(\Delta M \uparrow\)

  • sell assets / privatise (bah)

Maastricht Treaty EU

  • Debt to GDP Ratio: \(b = \frac{ B }{Y} \le 60\)

    • all government entities (local etc.)

  • Deficit Ratio: \(\frac{ \Delta B }{Y} \le 3\%\)

Equilibrium Debt Ratio: \(b^* = \frac{ g-t }{y-r}\)

Scenarios:

img

  • Debtor: A + D

  • Creditor: B + C

=> Debt is also dependent on Economic Growth, nut just deficits

Phase Line#

Movement of Debt over Time,

  • depends on \(\Delta b\) (Neuverschuldung)

  • and level of \(b\) (Grad der Verschuldung)

img

Cases:

  • A = Debtor (\(\Delta b>0 \ \&\ b > 0\))

  • B = Creditor (\(\Delta b<0 \ \&\ b < 0\))

  • C = short run debtor

  • D = short run creditor

European Central Bank#

can do Seigniorage (Münzgewinn) = Profit from creating money

  • Profits are shared by the national banks

  • and given to finance ministers

even Non-Euro members have to contribute

Interest Rate and Debt#

Interest Rate i on Debt fluctuates wildly

  • dependent on Default Probability \(\omega\)

  • and riskless interest rate \(i_0\)

  • judged by credit rating agencies with rating R (AAA -> D)

img

European Debt Crisis#

Policy Options:

Austerity (Fiscal Compact 2013)

  • rules similiar to Maastricht

  • aggavates recession

  • makes investments difficult

=> bad idea! doesnt work

Bailout (European Stability Mechanism)

  • Help from other european insitutions

  • debt refinancing, but cuts to programmes

  • also newer in NextGenEU (Covid)

Quantitative Easing (PSPP)

  • ECB buys Bonds with fresh money

  • lowers interest rate for deficits