South-Western College Publishing - Economics  
Long-Term Affects of the Deficit
Subject Deficits
Topic Taxes, Spending, and Deficits
Key Words Deficits, Long Run, Taxes, and Spending
News Story

The federal budget deficit for fiscal year 2003 has been recorded at $374 billion by the Office of Management and Budget. This figure represents 3.5 percent of gross domestic product (GDP) and falls short of the earlier predicted deficit of $455 billion.

"As a percentage of gross domestic product, the deficits are below the historical peaks that we've seen in the past," according to J.T. Young, a spokesperson for the Office of Management and Budget. Recent history shows the 1983 deficit, for example, to be 6 percent of GDP; by 1992 the deficit had fallen to 4.7 percent of GDP, and now, in 2003, the deficit is only 3.9 percent of GDP.

What this analysis fails to recognize is the Social Security surplus (payroll taxes collected the government but not paid out in benefits) which, when factored in to the computation, yields a far larger budget deficit of $531 billion, or 4.9 percent of GDP.

Workers have paid in more payroll taxes since 1983 than the Social Security Administration has paid out in benefits. This surplus was supposed to be used to pay down the national debt, not finance current government expenditures. Richard Kogan, senior fellow at the Center on Budget and Policy Priorities explains, if the Social Security surplus is used to pay down the debt before the baby boomers retire, "our other debt will be lower and we'll be in a better position to borrow funds to pay for benefits."

The three budgets coming out of Congress and approved by the Bush administration uses $480 billion in excess social security payroll taxes for government programs, effectively reducing the reported deficit.

Regardless of the spin that politicians and statisticians put on the data, using excess payroll taxes for unintended purposes hides the true size of the actual deficit and the question remains as to the long-term effect of deficit spending by the government.

(Updated January, 2004)


Discuss the difference between the deficit and the national debt.

2. Discuss the long-term implications of a growing deficit as a percent of GDP.
3. If the government does borrow funds in the future, as suggested by Mr. Kogan, what effect might that borrowing have on private investment?
Source Daniel Gross, "How to Make the Deficit Look Smaller Than It Is," The New York Times Online, November 23, 2003.

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