A feature article in the WSJ today, What? Spending Restraint?, gives an overview of the state of the federal budget deficit. The upshot? The deficit is going down, relatively quickly, because of economic growth. And that the deficit is not historically out of bounds for a country recovering from an economic downturn:
In equally good budget news, federal revenues are also bouncing back as economic growth continues. Over the long term, federal revenues have averaged roughly 17% to 19% of GDP. They soared to 21% during the late Clinton years, which is one reason the Bush tax cuts were so important. Amid recession and the burst stock-bubble, however, revenues dipped below 16% in recent years. Now they're heading back toward their normal range.Fiscal 2004 ended with a federal deficit of $413 billion, well under the Office of Management and Budget's February projection of $521 billion. In October, the 12-month deficit came in under $400 billion, and in the (admittedly brief) three months ending in October the 12-month trend was heading toward $310 billion.
Douglas Holtz-Eakin of the Congressional Budget Office told us that "Economic growth, which we anticipate to be pretty robust, leads to reductions in the deficit from what was this year $413 billion, or 3.5% of GDP. And if you go forward, you're down to about three [percent of GDP] on the baseline next year, and about 2.5 or 2.6 the year after that." In historic terms, that's getting close to normal since the deficit has averaged a bit above 2% of GDP for the entire postwar period. "So I think it is the case that business-as-usual with tight restraint on spending will bring the deficit down over the near term to levels that we've seen," Mr. Holtz-Eakin adds. And all with no tax increase required.
As for the national debt, that's also not a cause for alarm. As the nearby chart shows, overall federal debt as a share of GDP is estimated to be below 40% in 2005, still well below the recent peak of 49.4% in 1993. That is easily manageable by historic standards, and in fact should begin to decline again if the economy keeps growing and annual deficits begin to shrink.
The chart attached to the artricle gives a very usefu overview of Federal Debt as a share of the GDP since 1940. The rise in the deficit in the early 90's was worrysome. It was an outgrowth of the economic problems that cost Bush 41 his job. The drop in debt levels in the late 90's is a function of that era's booming economy. If, as this article suggests, the US economy continues to chug along, the debt pciture shoudl turn continue to turn around this time as well.
More worrisome than the federal budget deficit is the balance of trade deficit. Ultimately, that will get solved by a reduction in the value of the dollar and in an increase in interest rates at home. That could lead to inflation and a stalling of US economic activity. The Fed will be walking a tight rope over the next couple of quarters to keep the trade and dollar situation from becoming a drag on the economic recovery.
Posted by georgegmacdonald at November 20, 2004 11:11 AM