Moving toward balance?
Date posted: March 15, 2011
The president’s recently released federal budget still projects deficits to the end of the decade. Does this mean the president’s plan doesn’t make any headway on getting our national debt under control? N.C. State University economist Mike Walden responds.
“Well, actually, it does. … And what we need to do here is look at the size of the budget deficit. Right now it is very large. The federal budget deficit — even under the first year of the new budget — is 12 percent of the economy. That’s gigantic.
“But under the president’s path in his budget — what his economic advisors and he think will happen actually — we will still run a deficit 10 years down the road, but it will shrink from 12 percent of the economy to 3 percent of the economy.
“Now people may say, ‘Well, how can that be?’ Well, what the president and his advisors think is going to happen is that the economy will grow faster than the rate at which the government borrows. And if that happens it makes the relative size of your debt (deficit) appear smaller.
“That’s kind of like if you were adding to your credit card. And let’s say you put 5 percent — you increased your debt on your credit card by 5 percent — but if your income went up 7 percent, then, yeah, you increased your debt but relative to the size of your income it is actually smaller.
“So you can actually achieve improvement in the budget deficit if the economy is growing fast enough. That, of course, is the big question: How fast will the economy grow?”
Category: Economic Perspective