Monday, November 29, 2010

The budget deficit and debt

The Budget Deficit and the Debt
What You Need to Know

 The deficit is the gap between what the government spends and the revenues it collects each year. We didn’t always run deficits. When President Clinton left office, the federal budget was running a surplus of $236 billion, or about 2% of the U.S. economy. And that extra revenue was being used to pay down the national debt. To understand how we moved from big surpluses to a growing deficit, it’s helpful to examine each of the major factors driving our nation’s current deficits.
  1. Every million additional jobs we generate reduces the deficit by $54 billion.
  2. It’s misleading (and dangerous) to confuse the short-term budget shortfall with the medium-term deficit or the long-term debt. Here’s a way of understanding it:
    1. The Short-Term Recession Shortfall (1-3 years): The Great Recession wasresponsible for 61 percent of the deficit last year.
      1. Tax receipts fell as people lost jobs and income and businesses failed; federal tax revenues declined from 18.5% of GDP in 2007 to 14.8%.
      2. Spending rose with government supports such as unemployment insurance, the Recovery Act, TARP funds, payments to Fannie Mae and Freddie Mac and discretionary outlays for defense spending, from 19.6% of GDP in 2007 to 24.7%.
    2. The Medium-Term Bush Deficit (10 years):
      1. We ran a $236 billion surplus before the Bush tax cuts, but we have run deficits for the past 9 years.
      2. The ten-year projected deficit is entirely explained by the economic downturn, the Bush tax cuts and the wars in Afghanistan and Iraq. Bush tax cuts and the wars made up $500 billion of the 2009 deficit and will create $6 trillion in deficits and debt service over the next decade. From the Economic Policy Institute.

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