• Large Future Deficits
• Demographics
• Future Costs
• Macroeconomic Problems
• Slow Economic Growth
• Generational Accounting
• Increased Interest on Debt
• Capital Flight
• Economic Solutions
• Social Security
• Medicare
• Discretionary Spending
• Taxes
• Political Limitations
• Ideological Difference
• Partisan Politics
• Public Awareness
• Deficit Politics
• Entitlement Spending
• Policy Recommendations
• Complete Recommendation


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Deficit Politics

Over the past 5 years several political factors have created a significantly larger deficit.  

• Tax Cuts During War Time - Running up large deficits during times of war is a historically acceptable policy. National Security is generally agreed to be well worth the cost. However, in the past, taxes generally were not reduced coincidentally with an increase in war expenditures.  President George W. Bush and Congress broke that trend by fighting the “War on Terrorism” and cutting taxes thereby drastically increasing the federal deficit. The President is currently pushing to extend his tax cuts past the 2010 expiration date, despite surges in defense spending. If there continues to be a sufficient political imperative to maintain this fiscal disconnect, the war poses a significant political hindrance to addressing the deficit crisis.

• Surplus - During the early 1990’s, the federal budget deficit was considered a pressing issue.  This allowed for the formation of a political consensus in favor of a balanced budget.  As a result measures were taken to address the issue.  Cuts in federal spending were instituted under The Budget Enforcement Act in addition to rules placed on discretionary spending known as PAYGO.   These cuts in spending along with the new spending restrictions led first to a balanced budget, and later a surplus during the second term of President Bill Clinton.  However, aware of this surplus, Congress increased their spending.  This new spending exhausted the surplus.  After this point, new spending persisted, adding to the deficit.

• Recession - The U.S. economy experienced recession during 2001 and 2002.  Recovery from this recession was aided by financing from tax cuts and automatic stabilizers; recovery was essentially financed by a federal budget deficit. From an economic perspective, this is perfectly acceptable.  Running a deficit can provide the necessary stimulation to end recession.  However, as can be seen from CBO’s graph of the cyclically adjusted deficit, fiscal stimulus continued well after the 2001 recession ended

   

  The Cyclically Adjusted Surplus or Deficit

  (Percentage of potential GDP)

   

  Source: Congressional Budget Office.

  Notes: The shaded vertical bars indicate periods of recession. A recession extends from the peak of a business cycle to its trough.

  The data points for 2004 and 2005 are projected.

We have noted that problems arise when the budget is not balanced following economic recovery.  Currently, the Republican Party is holding steadfast in their efforts to make President Bush’s tax cuts permanent.  While the tax cuts may have been effective in stimulating funding our economic recovery, their current effect is that of enlarging the cyclically adjusted federal budget deficit.  The Republican Party’s opposition to tax increases is perpetuating this result, and thus poses another political obstacle to deficit solutions.