Supply Side Wealth Housing Activity Term Paper

Excerpt from Term Paper :

In spite of subsequent attempts to control spending, the average net savings, as estimated in the NIPA attained a low of negative $40 billion or negative 0.4% of GDP during the first quarter of the year. A majority of these authorities are subject to balanced -budget necessities and added rules which need them to respond to fiscal disturbances. Hence in addition to decreasing operating expenses, government relied on reserves, introduced bonds in the market, sold assets and performed lot of one-time corrections in the timing of payments to balance their books.

Of late, a lot have even enhanced taxes and fees thus countering the trend towards lower taxes, which existed during the late 1990s. Latest indications have been that the fiscal stress in this sector has started to relieve. The enhancement shows a perceptible upturn in collections of taxes in recent quarters whereas control on operating expenses on the whole remains in place. Based on NIPA, actual spending on compensation and on goods and services procured by the state and local governments was a bit altered during the second half of 2003. As regards the third quarter of 2003, state and local net saving had gone back into encouraging territory. Total issuance of debt by the state and local governments was rather good the previous week. Weak tax receipts from a slow economy, substantial demands for investments on infrastructure, and low interest rates, everything had a part to play to massive speed of borrowing. Borrowing was the strongest during the second quarters of the year, since governments took benefits of the extremely low longer term rates to invest in capital expenditure and to give refund existing costly debt.

Due to the financial stresses encountered by these Govts, the credit ratings of a number of States importantly, California were lowered last year. Even though bond downgrades were more compared to the upgrades for a sector in total, the imbalance among them was smaller compared to what it was in the 2002. Since the first three quarters of 2003, The U.S. current account deficit became more in respect to the comparable period in 2002, a gesture mainly showing developments in the deficit on trade in goods and services. The total investment earning went up during the same time, as receipts from overseas went up and payments to foreign investors in the United States became low. The trade deficit became more remarkable during the first half of 2003 but became narrow a bit in the third quarter since the value of exports rebounded in response to strengthening foreign economic operations and the depreciation of the dollar.

Restrictiveness of non-price conditions on borrowed funds:

Weak tax receipts from a slow economy, major demands for infrastructure investments, and low interest rates, everything played a part to the heavy pace of borrowing. Borrowing was forceful during the second quarter of the year while governments took benefit of the extremely low longer-term rates to finance capital expenditure and to advance refund existing higher-cost debt. Due to the financial pressure confronting these Governments, the credit ratings of a lot of states most importantly California were lowered in the previous year. Even though bond downgrades were more in number meant for the sector as a whole, the imbalance among both of them was lesser than compared to what it was in the year 2002. Since the first three quarters of 2003 the U.S. current account deficit widened as against the comparable time period in 2002, a gesture mostly showing developments in the deficit on trade in goods and services. Total investment income went up in the same period, with the increase in receipts from overseas enhanced and payments to foreign investors in the United States went down.

Economic Conditions:

The federal budget deficit went on to broaden in the fiscal year 2003 due to sluggish rise in nominal incomes, outlays linked with the war in Iraq, and legislative actions that lowered taxes and improved spending. The deficit in the combined budget totaled $375 billion, up considerably from the shortfall of $158 billion reported during the fiscal year 2002. The Budget Office of the Congress is anticipating that combined federal deficit will go up more in fiscal 2004, to more than $475 billion. Federal receipts have come down in each of the past three years; the slump of approximately 4% in the fiscal year 2003 pulled the ratio of receipts of GDP to 161/2, 2 percentage points below the average for the last thirty years. Approximately, 50% of the decrease in receipts the previous years was an outcome of legislation that shifted due dates for corporate payments between fiscal years. Apart from that, collection of personal income tax plummeted sharply due to the gradual rise in nominal wages and salaries, reduced capital gains collections in the year 2002, and the tax cuts passed under the Jobs and Growth Tax Relief Reconciliation Act of 2003.

The act gave refund checks to households qualified for the 2003 increment to the child tax credit and brought outcome in reduced withholding schedules for individual taxpayers. The act also lengthened the partial-expensing incentive for companies, however since corporate profits hastened sharply in the previous year, corporate tax receipts went up significantly following adjusting for the changes in the timing of the payments. Concurrently, federal outlays apart from interest expense went up at a great pace for the second successive year in fiscal 2003; those outlays went up about 9% after rising 11% in fiscal 2002. Incited by the actions in Iraq, spending on defense went up again, and outlays for homeland security went up a more. Expenses for income support like unemployment insurance, food stamps, and child credits under the earned income tax credit, also showed a substantial hike. The continuous hike in the cost and utilization of medical services were persistent in propelling up spending for Medicare and Medicaid.

On the whole, real federal consumption and investment -the calculation of federal spending which is included in real GDP went up 6% since the four quarters of 2003 following a rise 10% a year back. The federal Govt. had made more and more contributions to national savings during the later part of 1990s and 2000 as budget deficits showed the path to mounting surpluses. But with the swing back to huge deficits in recent years, the federal government has once again become a loss on national savings. Employing the accounting procedures abided in the national income and product accounts -NIPA, there has been a sharp plummeting of gross federal savings as a percent of GDP came down sharply in late 2001 and has been lower from that time, the drop playing a part in to a decline in total gross national savings as a percentage of GDP from 18% in the year 2000 to 13%, on average during the first three quarters of 2003. The federal savings total of estimated depreciation came down from its recent peak of 21/2% of GDP in 2000 to negative 4% of GDP, on average, during the first three quarters of 2003. As an outcome, in spite of a considerable pickup in savings from domestic nonfederal sources, largely, net national savings which is a vital determinant of private capital formation went down to less than 11/2% of GDP, on average, during the first three quarters of 2003, compared with a latest high of 61/2% of GDP during 1998.

Implications for interest rates and monetary policy actions:

There was a fall of interest rates for the greater part of first half of 2003, mainly in response to persistent weak economic data and a linked marking down of hopes for the federal funds rate. Data from the federal funds futures market implied that a substantial probability of a further casing of policy and did not involve any tightening prior to 2004. Although the geopolitical tensions came down, economic data considered weaker than expected economic data persisted to keep down treasury yields. The FOMC's in the aftermath of the May meeting that "unanticipated fall in inflation" continued to be a risk strengthened the concept that monetary policy would remain accommodative, and, of course, judging from market quotes on federal funds futures, it was anticipated…

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