January 25, 2020
The Congressional Budget Office reported that the budget deficit for fiscal year 2019 came in at $984 billion. For the current fiscal year (FY 2020) the budget deficit is projected to be $1.0 trillion. It will remain above the $1.0 trillion level 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 2029 it is expected to be $1.4 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 2029 — a decade from now — the deficit will climb to 4.5% 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 2039 the annual budget deficits will climb to 7.0% of GDP.
While we are firmly in the camp that budget deficits and government debt outstanding matter, the question is when that will become a problem. Perhaps during the next recession as revenues fall and government expenditures (on things like welfare benefits and unemployment benefits) rise and the deficit soars, perhaps people will take notice. The current situation, in our view, is not sustainable.
Stephen Slifer
NumberNomics
Charleston, SC
Follow Me