please help me understand this economics stuff...It is so confusing.?

Question

One alternative to balancing the budget annually or cyclically is to produce a government budget that would be balanced if the economy were at potential output. Given the cyclical nature of government tax revenues and spending, how would the resulting budget deficit or surplus vary over the business cycle?

The budgets passed by Congress and signed by the president show the relationship between budgeted expenditures and projected revenues. Why does the budget require a forecast of the economy? Under what circumstances would the actual government spending and tax revenue fail to match the budget as approved?

Answer 1

Ok. One question at a time.
First, the balanced budget at potential output. The logic behind these kind of budgets is to make them anti-cyclical. Let's use an example. Chile, for example, has a"potential output budget". In their case, the budget is based on the price of copper (which represents 60% of their exports and about 15 to 20% of their GDP). They make a budget that is balanced, assuming that the price of copper will be at the 10 year average of US$ 1.00 per pound. If they are in the upper side of the business cycle, which means the price of copper is higher than US$1.00 per pound, then they save the surplus that they get. When they are in the lower side of the business cycle, that is to say that the price of copper was below US$1.00 per pound, then they spend more than they are collecting, running a real budget deficit. This budget deficit is covered with what was saved during the surplus. So, in escence, you would increase surpluses in the positive end of the cycle that you will spend in the negative end of the cycle.

Second. Since the budget is a "projection" of inflows and outflows, you obviously need to project the revenues that your tax revenues depend on. You forecast the economy to try to figure out what kind of sales and profits the economy is going to make because the taxes that the government collects depend on those sales and profits. If you forecast incorrectly, your expenditures will not match your revenues.

Answer 2

I see a budget deficit when the economy is slower than full output and a budget surplus when the economy is at full output. If the purse is being managed based upon full output, then we have an assumption about strong tax revenues which will cover or meet government spending as long as we are at full output. But if the level of output falls (economic activity is falling), then there won't be enough tax revenues while the need for government spending would grow in this dark environment.

When unforeseen events enter the picture, i.e. war, terrorism, natural disasters, etc. the projected and actual will vary such that the spending will exceed the revenues.

Answer 3

Your question is asking for responses you want to hear. Sorry to disappoint you , but does Obama understand economics? Come on, a naive guy like him with only three years in the Senate doesn't understand the global economic situation. Job losses are the result of NAFTA which Bill Clinton instituted and you know that. Foreclosures are the result of banks extending credit to those who wouldn't ordinarily qualify. And now you cite extreme gas prices. If you feel gas prices are because of Bush policies, I really feel sorry for you and your ultra liberal followers, because you do not understand the complexity of economics, or the impact of supply and demand on the global economy. Instead, you should ask why the democratic Congress won't let us drill for oil, construct nuclear power plants or allow electric power generating plants to build without costly environmental conditions. Try to think beyond the scope of your nose.

Answer 4

The deficit would increase when you have a spending power and decrease when you have a thrify power.

The forecast is needed to project the potential changes.

The actuals would be different if the economy changed during the time (the forecasts would be incorrect) or the government changed/broke the spending policy.