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157 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0154 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. July 18, 2003 Advisory No. 157 MID-SESSION REVIEW PROJECTS HIGHER FEDERAL DEFICITS, BUT NO NEED TO PANIC The Administration has released its Mid-Session Review of the federal budget. It shows increased federal budget deficits relative to the February release. The increases are due largely to the weaker than hoped for economic recovery and spending on the war in Iraq. As the chart below shows, although the deficits are large in nominal terms, they are not unusually big as a share of GDP following a recession. They are projected to decline quickly as a share of GDP as the recovery progresses, especially if the government adopts a modicum of spending restraint. The deficits are not large enough to have any significant adverse effect on interest rates or on the economy. Debt as a share of GDP will rise only modestly, and will remain well within historic norms. The deficit in perspective. As can be seen in Table 1, the Mid-Session Review projects deficit increases. The deficit is projected to jump to $455 billion in fiscal 2003 and to $475 billion in fiscal year 2004, but it would be halved by fiscal year 2008 under the Administration's budget proposals. As a percent of GDP, the deficit numbers are less alarming. They would represent 4.2 percent of GDP in FY 2003 and FY 2004, and only 1.7% in FY 2008. These are the policy deficits, including the planned $400 billion in spending on prescription drugs, which boosts the deficit, but also including Administration proposals to restraint the growth of discretionary spending in the future. g~,3 A3~ S I 6g~ ~ A~ ~ Chart 1 Federal Deficit and Federal Debt Held By The Public As Percentages of GDP, 1970 - 2008 60% 50% -Federal Debt Held by the Public as Percent of GDP 40% - o. 20% * - the Federal Reserve) as Percent of GDP 10% 0% Yearly Federal Deficit as Percent of GDP -10% 1970 1975 1980 1985 1990 1995 2000 2005 Fiscal Year Sources Data for 1970 2002 from U.S. Budget Historical Tables; and estimates for 2003 2008 from OMB's Mid Session Review (To calculate debt held by the public excluding the Federal Reserve, debt held by the Fed was estimated for 2003 2008.)

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