US deficit is shrinking, for now
With the robust economy, tax revenues are pouring in. But rising costs lie ahead.
from the February 21, 2007 edition
Page 2 of 2
Page 1 | 2
The answers will have a big impact on the budget, and may not be resolved before a new president takes office in 2009.
The long-term outlook remains sobering, all sides agree. The cost of Medicare, in particular, is slated to soar due to healthcare inflation and an aging population.
Even the near-term outlook comes with an asterisk. When Bush took office in 2001, the CBO was forecasting a decade of budget surpluses totaling more than $5 trillion. Then came a recession, the terrorist attacks of 9/11, and enormous wartime spending. The Bush tax cuts helped to stimulate the economy, but at the cost of lower tax revenue.
"We had three years where revenues went down," says Mr. Horney. "All that has happened is that we have ... caught up from the really bad decline that we had."
Still, analysts say the recent budget gains are good news for the government and the economy.
The budget deficit now stands at about 1.4 percent of the nation's GDP, well below the 2.3 percent that's been the norm since 1970, according to economist Michael Darda of MKM Partners in Greenwich, Conn. "At the current pace, the budget could move back into surplus as early as May 2008," Mr. Darda wrote in a report to clients last week.
That isn't a forecast, but it shows how the nation's fiscal health is closely related to that of the overall economy.
A more stable budget outlook, in turn, has benefits for the economy.
The less money the government has to borrow to pay its bills, the more is left for investment in new goods and services. Alternatively, the nation will be less reliant on foreign lenders to fund that investment – debt that siphons away a portion of national wealth.
"Unexpectedly strong revenue growth" has improved the outlook quite a bit, says Mr. McMullen.
In the CBO projections, for example, the nation's public debt is forecast to fall from 37 percent of GDP in 2006 to 30.5 percent of GDP in 2012.
In the longer run, the rise of entitlements such as Medicare could force difficult choices to keep that debt from rising again.
Conservatives say it will be vital to contain costs. "If nothing changes in Washington then both revenues and spending will be higher," says Chris Edwards, a tax expert at the libertarian Cato Institute in Washington. "It'll hammer the economy," he says, as government takes a larger share of GDP.
Others say the answer will probably involve tax hikes as well as some reductions in promised entitlement benefits – and that a modest increase in taxes need not damage economic growth.
Both sides agree on the need to tame medical inflation, if not on how to do it.
"If we were able to reduce the growth of the cost of healthcare," says Horney, "that would definitely be good for the economy."
1 | Page 2
 |
||
|
RSS feed
