Questions on the Economist's article: "The not-so-incredible shrinking deficit"
- From: "Brablo" <gestureofrespect@xxxxxxxxx>
- Date: 23 Aug 2005 07:09:32 -0700
I have a question regarding this article from the Economist.
Q1: The article states that: "Federal debt will tick slightly upward,
reaching almost 40% of GDP by 2010, and then begin declining as the
expiring tax cuts push the budget back towards balance."
I thought that the US's Federal debt was in the range of $7T, and our
economy was about $12. Therefore, our debt/GDP is about 84%. However,
the article implies that our debt/GDP is less than 40%, but in the
future it will slowly increase to 40%.
Please explain this to me.
-----------------------------------------------------------------
The not-so-incredible shrinking deficit
Aug 16th 2005
>>From The Economist Global Agenda
A new forecast from the Congressional Budget Office shows America's
budget deficit once again coming in lower than expected. Republicans,
unsurprisingly, are rushing to claim credit for sound economic
management. But the long-term outlook is still soaked in red ink
GEORGE BUSH has the dubious distinction of presiding over the largest
negative budget swing in American history: from a surplus of $236
billion in 2000, the year he was elected, to a deficit of $412 billion,
or 3.6% of GDP, when he stood again in 2004. Even in an economy with
output of around $12 trillion, $648 billion is a lot of money to
misplace.
Analysts were aghast when the Bush administration's Office of
Management and Budget (OMB) projected that the fiscal year to September
2005 would bring bigger deficits still: $427 billion, according to
numbers released in February. The more cynical observers suggested that
the administration was simply releasing a gargantuan number for the
pleasure of later telling voters that the budget deficit was closing
faster than expected. In support of their argument, figures released by
the Congressional Budget Office (CBO) in March projected a deficit of
only $365 billion.
When the OMB revised its numbers sharply downward in July, to $333
billion, the doubting Thomases seemed to have a good case. Now,
however, the CBO, which is generally seen as more level-headed, has
followed suit. In its Budget and Economic Outlook, released on Monday
August 15th, the CBO's projections moved roughly into line with the
administration's, forecasting a shortfall of $331 billion, or roughly
2.7% of GDP.
America's economy
United States
The Congressional Budget Office publishes its Budget and Economic
Outlook. See also its monthly review for August. The White House
reports on economic growth. For futher information on America's economy
visit the Department of the Treasury.
Republicans, unsurprisingly, rushed to claim credit for the
improvement. Tom DeLay, the majority leader of the House of
Representatives, said that the brighter budget picture "should come
as no surprise" to anyone familiar with the Republican platform of
cutting taxes to spur economic growth. Many voters are also prepared to
give Mr Bush the benefit of the doubt. The economy, after all, seems to
be chugging along nicely. Real GDP grew at a solid 3.4% in the second
quarter of 2005, an annual rate envied by most European countries. Even
America's budget deficit doesn't look so bad when compared with the
likes of Italy and Germany.
Democrats, of course, pooh-pooed the notion that a mere third of a
trillion dollars-worth of new debt was anything to smile about. More
significantly, Douglas Holtz-Eakin, the CBO's director, gave a
warning that the improvement, while welcome, seemed to be largely
temporary. The CBO's report attributes most of the decrease to an
unexpected surge in corporate income tax receipts, thanks to
double-digit growth in corporate profits since the end of the 2001
slowdown. But the boom in profits cannot be sustained over the long
term, especially since much of the increase seems to stem from
short-lived changes to the tax code.
Further out into the forecast period, the CBO says its outlook is
largely unchanged. The deficit will shrink slowly until 2010, then drop
sharply as Mr Bush's tax cuts expire. Federal debt will tick slightly
upward, reaching almost 40% of GDP by 2010, and then begin declining as
the expiring tax cuts push the budget back towards balance.
The cloudy crystal ball
All of this is, of course, more art than science. The CBO itself notes
that even if there are no legislative changes in levels of taxation or
spending, the vagaries of economic forecasting mean that there is a 25%
chance that the budget will be in balance, or show a surplus, in
2010-and a 10% chance that that year will see a budget deficit
greater than 5.9% of GDP. And many of the assumptions that the CBO
makes, or is forced to make, seem rather far-fetched. It assumes that
discretionary spending grows only at the rate of inflation, for
instance, even though in the recent years this category has grown at
multiples of the inflation rate. It is also required to proceed as if
all of Mr Bush's tax cuts were destined to expire on schedule, when
in fact there is considerable interest in making them permanent.
But there's one prediction it is making with a high degree of
confidence: Social Security and Medicare, America's old-age
programmes, will eat up an increasing share of federal spending and
thus spell big trouble for the budget. The first "baby boomers"
will be eligible for early retirement in 2008. The strain of caring for
the swelling ranks of America's aged will begin to tell then, and it
will get steadily worse throughout the remainder of the forecast
period, which ends in 2015. The CBO thinks that Social Security,
Medicare and Medicaid, America's health-care programme for the poor,
will together account for more than half of federal spending by 2015.
The CBO's forecasting period does not stretch far enough to cover the
biggest shocks to come. It is not until 2017 that Social Security's
outflows will begin to exceed its inflows, forcing the government to
tap general tax revenues to pay benefits. Excess Social Security
contributions have been masking a large portion of the budget deficit
for years; without those "off-budget" surpluses, Bill Clinton would
have struggled to close the deficit in his last two years in office,
and last year's shortfall would have been well over half a trillion
dollars.
Mr Bush, of course, would argue that this is precisely why the country
needs his proposed (and floundering) reform of Social Security. His
opponents retort that it calls for a thorough repeal of his changes to
the tax code. With 2017 comfortably distant-sounding, neither seems
particularly likely. Instead, America's government is bringing back
the 30-year bond, which it retired in 2001 when surpluses seemed to
stretch out as far as the eye could see.
As they run up the national charge account, legislators can at least
take comfort that the latest round of downward revisions to forecasts
seems to cast further doubt on the "twin-deficit hypothesis", which
argues that Mr Bush's spendthrift ways are driving up the
current-account deficit and putting the country in danger of a
catastrophic revaluation of the dollar. Trade deficits have continued
to soar even as budget deficits have come down, which tends to support
a theory advanced by Ben Bernanke, the chairman of Mr Bush's Council
of Economic Advisers. He has suggested that a global savings glut is
flooding America with cheap money, and that the government deficits may
in large part have been mopping up surplus capital that would otherwise
have been borrowed by America's already debt-ridden consumers.
But even Mr Bernanke has stressed that deficit-reduction should still
be a priority. "Not catastrophic" seems a poor guideline for fiscal
policy, government or personal. For now, however, it appears to suit
America's politicians and consumers just fine.
.
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