4.7 Federal Debt
Problems associated with federal debt
- Threat to long-term economic growth due to resources taken out of the capital market and not allocated to productive use (e.g., loans to firms)
- Payments to foreign investors
- Constrains response to important issues (e.g., financial crisis, COVID-19)
- Potential for inflation in the case of debt monetization (unlikely in countries with strong institutions)
Federal Budget Cycle In general, the federal budget cycle involves four steps:
- Executive preparation
- Legislative review and approval
- Budget implementation
- Audit and evaluation
Tasks and functions of agencies and institutions involved in the budget:
- Executive branch agency: Office of Management and Budget
- Legislative branch agency: Congressional Budget Office
- House and Senate subcommittees, appropriation bills, etc.
Other concepts to know:
- Mandatory versus discretionary spending
- Federal deficit: Consequences
- Political, economic, and demographic factors contributing to the change in spending and the federal budget deficit
Current Services Baseline Current Services Estimate (see CBPP The Current Services Baseline: A Tool for Understanding Budget Choices)
- Baseline or benchmark “reflecting this year’s enacted policies and programs for each year in the future”
- Part of supporting material (e.g., current services budget)
Submission of President’s annual budget and supporting materials to Congress