The Deterioration in the US Fiscal Outlook, 2001–2010
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From 1999 to 2001, US budget surpluses averaged 2 percent of GDP. By 2011, the Congressional Budget Office was projecting persistent “current policy” budget deficits exceeding 6 percent of GDP, even after the economy recovered from the recession. This paper reviews the remarkable deterioration in the US fiscal outlook. It shows that more than half of the deterioration occurred before the 2007–9 recession, as a combination of tax cuts, increased spending, and worse than expected economic performance shifted the budget from surplus to deficit. The further deterioration since 2007 has two main components. Spending on Medicare, Medicaid, and Social Security is projected to increase by almost 3 percent of GDP over the first 10 years of baby boomer retirements, and interest costs are rising both because of the underlying fiscal imbalance and also as a result of the recession. The paper also discusses proposals for reducing the deficit, longer-term fiscal challenges, and the political economy of fiscal reform.
The author thanks Barry Eichengreen, Robert Feldman, Jurgen von Hagen, and Charles Wyplosz for many helpful discussions that led to an earlier version of this paper that appeared as a chapter in Eichengreen et al (2011). The author served as Executive Associate Director and then Acting Deputy Director of the Office of Management and Budget from 2009 to 2010.