October 23, 2008

Don't Be Afraid of Deficits

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As the candidates continue to talk about the economy, tax policy and ideas for buttressing the financial markets, the federal budget deficit, currently at approximately $455 billion, according to the White House, has come under scrutiny. At the most recent presidential debate, both candidates were asked how they might close the gap in the federal budget by the end of their first term. And what do you know, both candidates skated around the answer. Well, the real answer is that the budget deficit most likely cannot be closed within four years, nor does the deficit as it stands pose a large problem.

The numbers are staggering and scary, no doubt. The 2008 federal budget deficit is about $455 billion and the 2009 federal budget deficit is projected to be anywhere from $700 billion to an extremely liberal estimate of $1 trillion. The current economic problems will certainly diminish tax revenues for 2009, as expenditures will increase, especially as a result of the bailout plan, which could amount to $700 billion of expenditures. As if our financial markets were not already in dire straits, now we also have a tremendous budget deficit. But situation may not really be all that extreme. [img_assist|nid=32883|title=A comparison of the projected and actual budget deficit in 2008.|desc=|link=node|align=left|width=|height=0]

Some perspective is needed in order to fully understand the extent to which the federal budget deficit may be detrimental to the overall economy. The current deficit of $455 billion only amounts to 3.2 perecent of GDP. The post-WWII high for the budget deficit occurred in 1983, when the deficit was 6% of GDP. Thus, in absolute terms the deficit may be large, but relative to the size of the nation’s economy the current deficit is not out of the ordinary. An attempt to scare voters has been in place. Certainly spending will need to be reduced and tax revenues increased in order to fund entitlement programs. However, the current deficit should not be used as a political tool. Compared to historical trends, the budget deficit is not a dramatic problem and must be placed in perspective.