Friday, October 10, 2008

Budget deficit update

According to Martin Sullivan in the 10/6/08 Tax Notes, the budget deficit for 2009 could end up as high as $914 billion, or 6.2% of GDP, both of which would be all-time national records. This would reflect scoring the financial rescue plan on what seems the correct basis, if it can be done sufficiently accurately, which is to treat only the excess of outlays over the estimated present value of future receipts as a write-off.

Some time back I posted seemingly dire GAO estimates of rising budget deficits and public debt. Under those estimates, the deficit would not reach this level, relative to GDP, until the mid-2020s. So much for that.

True, this is a temporary phenomenon, reflecting both special outlays related to the financial meltdown and the counter-cyclical effects of a recession that, while it may be long-lasting, is merely part of the overall business cycle. In other words, it's reasonable to assume that annual deficits will decline again in a few years and only start rising again when baby boom retirement and the entitlements explosion really takes off.

Still, this is a huge hit on the amount of cushion that we have if we delay dealing with the long-term fiscal gap. Especially when one keeps in mind that there seem to be frequent adverse shocks. E.g., 9/11 followed by the Afghanistan and Iraq wars was one, and now this is another. While reasonable long-term forecasts won't treat a given adverse shock the same as a permanent change in tax and spending levels, they also shouldn't assume that there aren't going to be any more adverse shocks.

Yes, there are occasionally favorable shocks as well (e.g., the totally unanticipated revenue surge of the late 1990s, from some mix of real economic growth and the Internet, etc. bubble). But I'm putting my chips on a predominance of adverse shocks in the years ahead.

To put it all in perspective, if we manage to contain the current financial crisis it will be by virtue of using some of the fiscal cushion that we still have to buy ourselves out of trouble. But given everything else that is happening and not happening in Washington and the economy, this merely brings the fiscal crisis closer. That one, when and if it comes, will make the financial crisis look like a Sunday school picnic, and by definition we won't be able to buy our way out of it.

2 comments:

rajasekar said...

yes i agree that happening in Washington and the economy, this merely brings the fiscal crisis closer.
For:Outsource Tax Preparation
mailto:tinamike.davidson@live.com
http://Books2Taxes.com!

vinod kumar said...

I do not not understand temporary phenomenon in what ??