Going, Going …
Subject Budget Deficit
Topic Taxes, Spending, and Deficits
Key Words Budget Deficit, Budget Surplus, GDP
News Story

In the spring of this year, budget forecasts called for a surplus of $304 billion for the year. With analysts concluding it was affordable, President Bush pushed for, and Congress approved, a $1.35 trillion tax cut over 10 years. In the course of the year, the economy weakened resulting in reduced tax collections and increased expenditures that lowered estimates of the surplus. The terrorist attacks, which led to expenditures of $40 billion on emergency assistance and $15 billion on relief for the airlines, further depleted the surplus, and the Congressional Budget Office now expects the surplus to be $121 billion for the fiscal year that ended September 30. For the coming fiscal year, according to the most optimistic forecast, analysts predict a balanced budget and a more likely outcome of a return to deficit spending.

Although there is bipartisan political and wide popular support for the change in priorities, the shift in budget priorities has considerable consequences for the long term. Increased spending for defense does not have as great an impact on productivity improvement as investment spending and this may reduce future economic growth. The goal of reducing the national debt has been postponed. Reducing the national debt was expected to lower long-term interest rates, increasing capital investment and boosting productivity. Congress had tried to fence off revenues for Social Security, the so-called Social Security lockbox, but restructuring our priorities will open the lockbox, raising questions about how future Social Security entitlements will be funded. Funding for prescription drugs for retirees will also likely be delayed a few more years.

Members of Congress have agreed that national security should be the highest priority and, therefore, it is entirely appropriate to run a deficit under these circumstances. Analysis by House Democrats indicates that the budget deficit will be $8 billion next year, and up to $70 billion under more pessimistic assumptions. Goldman Sachs, the investment firm, estimates that the deficit will be $25 billion.

(Updated November 1, 2001)

1. What is the impact of rising unemployment on Federal income taxes? On funding for Social Security and Medicare? What is the impact of rising unemployment on government expenditures? What specific programs does the government spend more on?
2. Stock market prices have tumbled in recent months. What is the impact of falling stock prices on government revenues? Stock prices have fallen, in part, because corporate profits have fallen. What is the impact of declining corporate profits on government revenues? Explain.
3. What is the impact of smaller surpluses or increased government debt on interest payments that the government makes? How does this affect the federal budget?
Source Richard W. Stevenson, "In Rapid Shift, a Budget Surplus Is Expected to Turn Into a Deficit," The New York Times, October 1, 2001

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