"I would be delighted to have a non-partisan explanation for the massive deficit announced by the President this week. I would like to know the following:
- What caused it?
- Can it be good?
- Can it be corrected without raising taxes?
- How should it be dealt with?
- How long should it take?"
Before we begin, some backround information on the budget deficit. Experts from a June 29, 2008 New York Times article on the budget deficit:
- "The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor...
"Mr. Nussle predicted Monday that the deficit would more than double in the current 2008 fiscal year — to $389 billion, from $162 billion in 2007 — before shooting up to $482 billion in the 2009 fiscal year, which begins in about two months.
"The deficit projected for 2009 would be the largest in absolute terms, easily surpassing the record of $413 billion in 2004. The White House and many economists prefer to measure the deficit as a share of the economy. The projected 2009 deficit would be 3.3 percent of the economy. That is the largest share since 2004, but well below the percentages recorded in the 1980s and early 1990s. In 1983, the deficit was 6 percent of the overall economy."
What Caused the U.S. Federal Budget Deficit to Get So High?
Perot Charts has an excellent chart here showing spending and tax revenue, as a percentage of GDP, from 1980 to 2008. From the chart, it becomes clear that since 2000 there are three basic sources causing spending to be higher than tax revenue:- Tax rate cuts in the beginning of the decade, in particular the tax rate cuts of 2001 and 2003.
- Accelerated levels of spending increases, particularly between 2001 and 2003.
- The slowing of economic growth in 2007 (and the associated housing crisis), which both acts to increase government spending and decrease tax collections.