Stop Freaking Out – The Deficit is Fine

15 May

Important new projections are out from the CBO showing that the US budget deficit is shrinking at an unexpectedly fast rate and will stabilize over the next decade (via CNBC):

…estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

“Revenues have been strong as the economy has outperformed a bit,” said Joel Prakken, a founder of Macroeconomic Advisers, a forecasting firm based in St. Louis.

Over all, the figures demonstrate how the economic recovery has begun to refill the government’s coffers. At the same time, Washington, despite its political paralysis, has proved remarkably successful at slashing the deficit through a variety of tax increases and cuts in domestic and military programs.

You can read the full CBO report here.  I’ve pasted the key chart below:
CBO Budget ProjectionsThis should lay to rest the constant clamoring from some that we are somehow facing an imminent debt crisis that requires debt spending cuts.  The biggest problem facing the US right now is high unemployment and a general lack of economic demand, not unsustainable levels of deficit spending and debt.  Bottom line: in the medium term, we’ve basically addressed the deficit.

One of the biggest threats to the economy right now, though, would be continued, premature cuts in government spending that further exacerbate the unemployment problem.  It’s somewhat ironic, but one of the biggest threats to growing the national debt would also be premature cuts in government spending.  If growth and consumption are hurt by government spending cuts, this will depress revenue and grow the deficit.

This shouldn’t be controversial.  Look at the UK and Europe to see what happens when you make deep cuts in government spending in the middle of a fragile economy.  Unemployment, no growth, rising deficits.   It isn’t pretty.

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