Copyright © 2016 by W. H. Freeman and Co.

PUBLIC FINANCEAND PUBLIC POLICY

FIFTH EDITION

Jonathan GruberMassachusetts Institute of Technology

Chapter 1Why Study Public Finance?

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.1 Federal Government Spending as a Percentage of GDP, 1930–2014.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.2 Total Government Spending Across Developed Nations, 1960–2015.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.3 Federal vs. State/Local Government Spending, 2014.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.4 Federal Revenues and Expenditures, Surplus or Deficit, and Debt, 1930–2014.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

XIV THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2012 TO 2022

CBO

Summary Figure 2.

Federal Debt Held by the Public Projected in CBO’s Baseline and Under an Alternative Fiscal Scenario(Percentage of gross domestic product)

Source: Congressional Budget Office.

Note: The alternative fiscal scenario incorporates the assumptions that all expiring tax provisions (other than the payroll tax reduction), including those that expired at the end of December 2011, are instead extended; that the alternative minimum tax is indexed for inflation after 2011 (starting at the 2011 exemption amount); that Medicare’s payment rates for physicians’ services are held constant at their current level; and that the automatic enforcement procedures specified by the Budget Control Act of 2011 do not take effect. The budgetary effects under the alternative fiscal scenario also include the incremental interest costs associated with projected additional borrowing.

of the previous calendar year) and by 1.1 percent next year (see Summary Table 2). CBO expects economic activity to quicken after 2013 but real GDP to remain below the economy’s potential until 2018. As of late 2011, according to the agency’s projections, the economy was only about halfway through the cumulative shortfall in total output that will result from the recession and its aftermath.

Considerable slack remains in the labor market, mainly as a consequence of continued weakness in demand for goods and services. In CBO’s forecast, the unemployment rate remains above 8 percent both this year and next. As economic growth picks up after 2013, the unemploy-ment rate will gradually decline, but it will still be around 7 percent at the end of calendar year 2015, before drop-ping to near 5½ percent by the end of 2017 and 5¼ percent by the end of 2022.

While the economy continues to recover during the next few years, inflation and interest rates will remain low. In

CBO’s forecast, the price index for personal consumption expenditures (PCE) increases by just 1.2 percent in 2012 and 1.3 percent in 2013, and rates on 10-year Treasury notes average 2.3 percent in 2012 and 2.5 percent in 2013. As the economy’s output approaches its potential later in the decade, inflation and interest rates will rise to more normal levels. In CBO’s projections for the 2018–2022 period, the annual change in the PCE price index averages 2.0 percent per year, and interest rates on 10-year Treasury notes average 5.0 percent.

Many developments could cause economic outcomes to differ substantially, in one direction or another, from those that CBO has projected. For example, the economy could grow considerably faster than the agency has fore-cast if the forces that have restrained the recovery fade more rapidly than anticipated. Alternatively, a significant worsening of the banking and fiscal problems in Europe could lead to further turmoil in international financial markets that could spill over to those in the United States and greatly weaken the economy here.

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 20200

20

40

60

80

100

120

140Actual Projected

AlternativeFiscal

Scenario

CBO'sBaseline

Projection

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.5 Debt Levels of OECD Nations in 2014.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.6 State and Local Government Receipts, Expenditures, and Surplus, 1947–2014.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.7 The Distribution of Federal and State Expenditures, 1964 and 2014.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Figure 1.8 The Distribution of Federal and State Revenues, 1960 and 2014.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Jonathan Gruber: Public Finance and Public Policy , Fifth editionCopyright © 2016 by W. H. Freeman and Co.

Unnumbered Figure 1.2