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Budget Deficit

December 3, 2018

The Congressional Budget Office recently released its budget deficit forecast for the period from 2018-2028  The budget deficit for fiscal year 2018 came in at $779 billion.  For the current fiscal year (FY 2019)  the budget deficit is projected to be $1.1 trillion.  It will remain above the $1.0 trillion throughout the entire 10-year budget forecast as more and more baby boomers retire and begin to draw Social Security and become eligible for Medicare.  By 2028 it is expected to be $1.5 trillion.

It is important to remember that the U.S. actually had modest budget surpluses in FY’s 2000 and 2001.  And from 2002 to 2007 the deficits were consistently in a range from $200-300 billion.  The recent widening of the deficit  was largely the result of the extraordinarily deep recession that lasted from the end of 2007 through mid-2009.

The best way to determine whether a deficit is “big” or “small” is to look at the deficit in relation to the size of the economy, or the deficit as a percent of GDP.  Over the course of the past 50 years, the budget deficit as a percent of GDP has averaged about 3.0%.  This should be regarded as a “sustainable” deficit.  Unfortunately, by 2028 — a decade from now — the deficit will  climb to 5.0% of GDP.  That is too large and if something goes wrong it could be even bigger.  The goal should be to shrink it to no more than 3.0% of GDP during the course of the next decade.

While the normal budget forecasting cycle is 10 years, if one looks just beyond that 10-year horizon the situation gets significantly worse.  If nothing is done to correct the situation by 2038 the annual budget deficits will climb to 7.0% of GDP.

Stephen Slifer

NumberNomics

Charleston, SC


Debt Outstanding

December 3, 2018

The Congressional Budget Office recently released its  budget deficit projections for the decade from 2018-2028.  For the current fiscal year it projects a budget deficit of $1.1 trillion.   A deficit of that magnitude will push debt held by the public to 79.4% of GDP.  For the first seven years of the previous decade debt held by the public averaged about 35% of GDP.  But the depth of the recession changed all that and debt as a percentage of GDP has exploded.

The budget outlook shows roughly comparable deficits for the next decade.  As a result, by 2028 the debt to GDP ratio is expected to climb to 96% of GDP.  Most economists would agree that a debt to GDP ratio of 50% would be sustainable, but if it should climb to 90% of GDP it could easily become a problem.  At the 90% mark investors would be less willing to buy that country’s debt, interest rates would rise, the interest expense for the Treasury would increase, and budget deficits would widen.  At 96% the debt ratio surpasses the 90% danger level.

However, the real deficit and debt problems begin immediately after the CBO’s 10-year forecast horizon.  This is because the baby boomers continue to retire.  They will start to receive Social Security payments and become eligible for Medicare.  If one looks ahead 20 years rather than 10, the debt to GDP ratio climbs significantly higher.  Indeed, by 2038 the CBO estimates that the debt to GDP ratio will be 120% rather than the 96% that they expect at the end of 10 years.  That is way beyond the so-called 90% danger level.

To prevent this from occurring Congress and the President need to come to an agreement to shrink the deficit so that debt outstanding relative to GDP shrinks to a manageable level of 50% or less over the course of the next 30 years.  It is do-able, but the question is whether our policy makers have the will to do what is necessary.

Stephen Slifer

NumberNomics

Charleston, SC