Main menu

Federal budget update: still a significant concern

Spending has slowed, and revenue has picked up, with the result that the budget deficit has shrunk from a high of $1.48 trillion (about 10% of GDP) last February to $1.3 trillion (about 8.8% of GDP) today. Although it's difficult to see in the top chart, spending has actually picked up a wee bit in recent months, and if and when new programs like ObamaCare kick in, spending is quite likely to reaccelerate, pushing government spending up to about 25% of GDP (or more) on a permanent basis; that would represent a 20% expansion in the relative size of government compared to the average of the postwar period. This is the part of the budget that weighs most heavily on the economy, since government spending is chronically inefficient, and transfer payments—which make up over half of the budget—create pernicious disincentives to work. Even though the deficit is likely to shrink a bit more as revenues continue to increase, the deficit is very likely to remain large enough to also weigh heavily on the economy, since it is absorbing a significant portion of our savings.

It is of great concern as well that the Federal Reserve is contemplating the purchase of a substantial portion of the deficit (thus monetizing the deficit, which is what economic textbooks refer to as a sure-fire way to create inflation) in coming months.

If not for promise of significant change as a result of the upcoming elections, this budget picture would all but guarantee disappointingly slow economic growth for the foreseeable future. If spending can be reined in as Republicans are promising, and if the Bush tax cuts can be extended, that would create a lot of light at the end of this otherwise dark tunnel. Fiscal austerity in this environment would, ironically, provide a significant boost to growth going forward.

Filled Under:


Posting Komentar