The Risky Business of National Budgets | Cash Course | PragerU

Everybody knows that you should have a budget when you're handling money. I got them. Two tickets to Autoland. So, about $400 for admission tickets. How much do we have left in our trip budget? Let's see. About $200. A budget keeps track of earnings and spending and helps you plan for future expenses. If you spend less than what you earn on your planned expenses, you've got a budget surplus. But if you spend more than you earn, watch out. You're running a deficit. Gas, food at the park, $100 for a picture with auto. But did you know that a nation also has a budget? While much larger in scale, a national budget similarly helps a nation plan its expected revenue, mostly through taxes, and is spending for a given year. Passing a national budget is usually a heated debate between those who want to spend more and those who want to spend less. Look, we can't afford a funnel cake and a fast pass. But I love funnel cake. When the government brings in more taxes than it spends, it's running a budget surplus. When the government spends more money than it brings in, it's running a budget deficit. This means there's insufficient revenue to cover the government's expected expenses. Let's just put some of the trip on our credit card. Are you sure? Maybe. Just like a person may borrow to cover a purchase they don't currently have the cash for, governments running a budget deficit often borrow money to meet their spending goals, every time a government runs a budget deficit, the national debt, or total money owed by the government increases. In 2023, the United States collected $4.5 trillion in taxes, but spent 6.2 trillion. Hi, I would like to increase my credit limit. Tell them it's for Autoland. They'll understand. I was thinking like $2.7 trillion. Hello. Governments primarily borrow money by selling securities. Treasure notes, bills, and bonds that acrue interest. Individuals, financial institutions, businesses, or even other countries buy those securities, and the government promises to pay those parties back at a future date. But enough of those promises can significantly raise the national debt. In the short term, running a deficit and selling securities can help a government cover spending obligations. However, long-term, a large national debt can bring harmful consequences, destabilizing an economy, devaluing a currency, or giving a country a reputation as a bad investment for other countries. Mom, trust me, you know I'm good for it. Mom, hello. Governments can pay off national debt in two ways. One is to run a budget surplus, spending less than what they expect to bring in through taxes and putting the extra money aside to pay down the debt. Another way governments try to pay off debt is by issuing more securities to raise money to pay for previous borrowing, which often just increases the national debt. A country with a high national debt and an unstable economy will seem like a credit risk, making it difficult to borrow. This could lead to default, which is when a borrower doesn't pay back a lender according to the terms of the agreement. The US national debt is $36 trillion. I think we're in trouble. While any national debt is serious, the number itself needs context. It's important to consider debt in relation to a country's size, economy, productivity, the reasons for that debt, and even the amount of economic freedom. The most common metric used to put the debt into context is the debt to GDP ratio, but that's a whole other episode. So, how will we pay for this? Don't worry, I'll figure it out. Another important thing to consider is just like payments on credit card debt, payments on a country's national debt often include interest. That's a fee, often a fixed percentage of a loan that has to be paid on top of the amount borrowed. These extra fees can add up and make the national debt much more expensive. In 2023, the United States owed around $875 billion in interest on its national debt. $875 billion. That sounds like trouble. You said it. It's not easy to reduce a nation's debt, but it's possible. With some proper budgeting and reduced government spending, some of the economic wealth of the United States could go to paying down the large national debt. This will help the country avoid the ugly consequences faced by highly indebted nations in the past. A budget deficit is not ideal, but the reality is that many countries spend more than they make. A strong economy and growing GDP can potentially offset the burden of high national debt, but over time that debt can bring crippling consequences. Understanding the national budget is part of being an informed citizen and staying aware of how government financial decisions can affect your budget. Okay, even on a budget. That was fun. That was fun. Hey, Otto, are you guys hiring? Watch more at pragerukids.com. And parents, don't forget to subscribe.