Reducing the budget deficit policy issues mark labonte congressional research center april 22 2011
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Reducing the Budget Deficit: Policy Issues Mark Labonte – Congressional Research Center April 22, 2011. Linden Graber. What caused the deficit? How large are projected deficits? How much reduction is necessary? How quickly should the deficit be reduced? Policy Options Conclusion. Agenda.

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Reducing the budget deficit policy issues mark labonte congressional research center april 22 2011

Reducing the Budget Deficit: Policy IssuesMark Labonte – Congressional Research CenterApril 22, 2011

Linden Graber


Agenda

  • What caused the deficit?

  • How large are projected deficits?

  • How much reduction is necessary?

  • How quickly should the deficit be reduced?

  • Policy Options

  • Conclusion

Agenda


Something to keep in mind

“The budget deficit each year from 2009 to 2011 has been the highest ever in dollar terms and significantly higher as a share of GDPthan in any other year since WWII.”

“The recent growth in deficits is the result of spending reaching its highest level as a share of GDP since 1945 and revenues reaching their lowest level as a share of GDP since 1950.

“From 1946 to 2008, budget deficits averaged 1.7% of GDP and exceeded 5% of GDP only three times. From 2009 to 2011, budget deficits are projected to average 9.4% of GDP.”

Something to Keep in Mind…


2001 frame of reference

  • FY2000: federal budget surplus = the highest ever in dollar terms and $236B

  • Jan 2001: CBO projects growing surpluses throughout the decade, with a $796B surplus expected for FY2010

  • FY2010: federal budget deficit = $1.3T

2001 Frame of Reference


What caused the deficit

  • Legislative Changes the highest ever in dollar terms and

    • Enacted laws affecting revenue and spending

    • Since 2001, legislative changes have increased federal budget deficits by $6.9T

  • Economic Changes

    • Inflation, unemployment rate, and interest rates are different from 2001 projections, affecting outlays and receipts

  • Technical Changes

    • More beneficiaries than expected, or fewer tax credits claimed than expected

    • Since 2001, have exceed $2T

What Caused the Deficit?


How large are projected deficits

  • We need to use a baseline projection: the highest ever in dollar terms and

    • CBO 10-year current lawbaseline

  • Baseline projections extrapolate current policy, not predict most likely outcome

    • Baselines help us compare policy options

How Large are Projected Deficits?


How much reduction

  • Targeted amount the highest ever in dollar terms and depends on policy goal:

    • BalancedBudget – neutral effect on national saving rate

    • Sustainable Path – small enough so that gov’t debt does not grow more quickly than GDP

  • US is currently at unsustainable level

    • To reform, most think we need fundamental changes to outlays and revenue

    • Long-term issue

How Much Reduction?


How much reduction1

How Much Reduction?


How quickly should the deficit be reduced

  • Reducing the deficit would have a contractionary effect in the short run

  • During a period of robust growth, this would be absorbed by other sectors of the economy

  • During a period of high unemployment (like today), reducing would cause UR to rise

    • Argument can be made to postpone

  • Risk of a fiscal crisis would argue for moving to sustainability as quickly as possible

How Quickly Should the Deficit be Reduced?


Policy options

Policy Options


Spending

  • Total Spending: the short run

    • Projected to be 23%+ of GDP for 10 year window

  • Discretionary Spending:

    • Freezing in nominal terms would not have much of an effect

    • Significant effect would require decreasing in nominal terms, which rarely happens

  • Mandatory Spending:

    • Health entitlement programs for elderly

    • Significant reforms would have only long run effect

Spending


Revenues

  • Five ways to reduce deficit: the short run

    • Redesign tax system

    • Add new taxes (carbon tax, VAT)

    • Increase existing taxes

    • Broaden tax base by eliminating deductions, exemptions, credits

    • Allow tax cuts to expire as scheduled

Revenues


Conclusion

Conclusion


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