South-Western College Publishing - Economics  

Surprise Surplus
Subject Budget Deficits
Topic Taxes, Spending, and Deficits
Key Words Budget Deficits, Budget Surpluses, President Clinton, Congress, Taxes, U.S. National Debt, GDP
News Story After all these years of talking about budget deficits, is it time to start thinking about budget surpluses? According to some economists, the recent budget agreement between President Clinton and Congress, coupled with our current rate of economic growth could generate budget surpluses listing into the next century. There would, of course, be strong incentives to use the surplus to cut taxes or increase spending. A number of legislators, anticipating a surplus, have already made suggestions of these types.

There are other choices besides increased spending and reducing taxes. Paying down the national debt would reduce the government’s interest bill – currently around $245 billion. The increased savings generated by a budget surplus would also lower interest rates causing additional savings of billions of dollars in interest payments. Reduced interest rates, by generating increased investment, would have a positive impact on economic growth.

A budget surplus equal to 1% of GDP if sustained for over a decade could reduce the national debt by $1 trillion, assuming no recession. This would result in the lowest post World War II debt to GDP ratio. It would also allow the government increased flexibility in its use of resources. (Updated January 15, 1998)

Questions
  1. Define the federal budget deficit.
  2. What is the difference between the budget deficit and the debt of the US government?
  3. How does the budget deficit behave over the business cycle?
  4. Why has the current budget deficit been falling?
Source John M. Berry, "Economists Support Budget Surplus," The Washington Post, October 5,1997

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