Reducing the Budget Deficit: Policy Issues (CRS Report for Congress)
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| Release Date |
Revised Feb. 15, 2012 |
| Report Number |
R41778 |
| Report Type |
Report |
| Authors |
Marc Labonte, Specialist in Macroeconomic Policy |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
In 2009, the federal budget deficit (the difference between outlays and revenues) exceeded $1 trillion for the first time, and it has remained above $1 trillion since. Those years also marked the largest the deficit has been as a share of gross domestic product (GDP) in the period since World War II. The budget is not projected to be on a sustainable path under current policy, in the sense that it leads the publicly held debt to continuously grow more quickly than GDP. The timing of deficit reduction remains a difficult issue because of continued weakness in the economy. If deficits are reduced too quickly, the economy might tip back into recession. If unsustainable deficits persist for too long in the economic recovery, it could crowd out private investment and, in the worst case scenario, investors could refuse to continue to finance deficits that they believed were unsustainable. As one example of the policy changes that would return the budget to a sustainable path, the Congressional Research Service (CRS) estimates that stabilizing debt as a share of GDP at its 2011 level would require budget deficits averaging 2.8% of GDP over the next 10 years. In dollar terms, the deficit could equal $200 billion in 2013, rising to more than $600 billion from 2015 on. Under the Congressional Budget Office's (CBO's) current law baseline, the deficit is already on a sustainable path. Under CBO's Alternative Fiscal Scenario, which modifies the current law baseline by assuming that expiring tax provisions and the 'doc fix' to Medicare are extended and that the future automatic spending cuts under the Budget Control Act (BCA) do not come into effect, the deficit would decline from more than 9% of GDP in 2011 to 5% of GDP in 2015, then rise to 6% of GDP by 2022. To reduce the deficit to sustainable levels under this scenario would require some combination of spending cuts and tax increases equivalent to roughly $800 billion in 2013, falling to $275 billion in 2015, then rising to $900 billion by 2022. The recent growth in deficits is the result of spending reaching its highest level as a share of GDP since 1945 and revenues reaching their lowest level as a share of GDP since 1950. Revenues were low because of the recession and because of the temporary extension of expiring tax provisions, such as the 'alternative minimum tax (AMT) patch' and 'Bush tax cuts.' If these tax cuts are extended again, revenues are estimated to be reduced by about 2.5% of GDP from 2014 on and will remain around their historical average from 2015 on.
