Saturday, July 30, 2011

The Fundamental Source of America’s Budget Deficit

Martin Feldstein explains, in a remarkable Project-Syndicate post, why America’s budget deficit is so large.


“America’s enormous budget deficit is now exceeded as a share of national income only by Greece and Egypt among all the world’s major countries.” It rose “from 3.2% of GDP in 2008 to 8.9% of GDP in 2010 (which in turn pushed up the national debt-to-GDP ratio from 40% to 62%. 
To be sure, the current deficit of 9.1% of the GDP is due in part to the automatic effects of the recession.”

But according to the Congressional Budget Office, if the economy had been at full employment in 2008-2010, the budget deficit still would have increased by 3.2% of the GDP and even after the economy returns to full employment in the future the deficit will remain so large that America’s national debt-to-GDP ratio will continue to rise for the rest of this decade and beyond.

“The budget outlook in subsequent decades is dominated by the increasing costs of Social Security and Medicare benefits, which are projected to take the debt-to-GDP ratio from 90% in 2020 to 190% in 2035. Fundamental reform to these programs is the primary challenge for America’s public finances – and thus for the long-term health of the US economy.”

Read the post here .

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