Deficits And Economic Priorities
The administration's budget update, released yesterday, shows the economic recovery is picking up steam. It also shows a budget deficit for 2004 of $475 billion. The budget deficit is a concern, and the president is determined to see that it comes down as forecast in the mid-session review. Even so, the current deficit must be kept in proper perspective. Three points are salient.</br></br>First, it is a textbook principle of prudent fiscal policy that budget deficits are appropriate in times of war and recession. Without doubt, the war on terrorism and the lingering effects of the recession continue to exert a large influence on the federal budget. To insist on budget balance in difficult times would mistakenly sacrifice the greater goals of economic growth and full employment.</br></br>Second, the deficit must be evaluated relative to the size of the economy. The federal budget deficit represents 4.2 percent of the nation's $11 trillion economy. Such a deficit is very manageable. The economy handled larger deficits in six of the past 20 years -- all in the aftermath of recessions.</br></br>Third, under the president's proposals, the deficit will shrink from 4.2 percent of gross domestic product in 2004 to 1.7 percent in 2008. The key to achieving this is more-rapid economic growth, which will bring in more tax revenue, together with restraint in the growth of government spending. Because the deficit is shrinking, the accumulated level of national debt is not expected to become problematic: In 2008 it will represent 40 percent of annual GDP, which is almost exactly the average since 1950.</br></br>Like most private forecasters, the administration expects the economy to improve. With the Jobs and Growth Economic Bill now taking effect and workers keeping more of what they earn, we project that the pace of economic growth will accelerate from approximately 2.2 percent over the past four quarters to 3.9 percent over the next four. Faster growth will translate into more jobs.