Transcript VassarTalkOnBudgetSurplus

A multiple-choice question
(from Regis Philbin’s show):
• What is the best thing to do with the budget
surplus?
–
–
–
–
(a) Reduce the debt
(b) Increase government spending
(c) Cut taxes
(d) All of the above
The correct answer is (d),
“all of the above”
• If that was your answer, then the next question is:
– In what proportions?
– For debt reduction, for spending increase, for tax cut
•
•
•
•
2-1-1?
2-2-0?
4-0-0?
Before you answer, let’s look at a few facts about
the surplus.
Is there really a surplus?
• Look at the handout: in the columns at the
right, you see many, many, negative
numbers, which are deficits.
– tax revenues were less than government
spending.
• But, starting in 1998, the minus sign
disappears; there is a surplus.
– tax revenues are now greater than spending.
Surplus and debt
• When the government runs a deficit, it increases
its debt
• When the government runs a surplus, it reduces its
debt
• surplus (‘98) = debt (end ‘97) - debt (end ‘98)
• 69 = 3771 - 3720 (+ 18 in new loans)
• Government borrows by issuing bonds
– and retires or buys back bonds when in has a surplus
What happened?
• How could forecasters have been so wrong?
• Tax increases?
– No that was in 1993,
– and was small compared to the tax cuts in the
early 1980s.
Income growth for upper
income taxpayers was very high.
• From 1994 to 1998 the percentage of taxpayers
with more than $200,000 in income rose rapidly
from 1.1 percent to 1.6 percent.
• The percentage of all income in the United States
earned by this group also increased, from 15
percent to 22 percent.
• And the share of taxes paid by this group rose
from 30 percent to 40 percent.
Federal budget summary
(billions of dollars)
Fiscal year 1998 versus 1995
Tax revenues 1720.4
Expenditures 1651.4
Defense
270.4
Interest
243.4
Soc. Sec. 379.2
Medicare 192.8
Surplus
69.0
1351.8
1515.7
272.1
232.2
335.8
159.9
- 163.9
Debt as a share of GDP
• Debt/GDP can stay constant or even fall
when there is a budget deficit
• Example
– 5% growth of GDP
– then ratio stays constant if
• Debt/GDP = Debt(1.05)/GDP(1.05)
• thus $3.7 trillion times (.05) = $185 billion deficit
• Debt/GDP ratio falls with balanced budget
29_04
PERCENT
OF
80
GDP
High after WWII
70
60
Steady decline
with small deficits,
some surpluses
50
40
Late 1980s
plateau
Deficits
are
back
Big deficits
start
30
Ratio declining
again
20
Post-WWII bottom
10
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995 2000
What is the forecast for the future?
• Look at the bottom row of the handout.
• Forecast of the budget surplus in the
future—as far as the eye can see.
• Note that there are two parts to this
– on-budget
– off-budget
• Many assumptions go into this forecast.
Assumptions for revenues
• The strength of the economy
• The extent to which people will move into higher
brackets
• The CBO assumptions for both are conservative.
• Most likely the economy will be stronger—Blue
Chip is at 4.1 versus 3.3 for CBO in 2000.
Assumptions for spending
• Discretionary spending depends on what Congress
does, on who the next president is, etc.
• CBO has three alternatives (see charts in handout):
– Inflated baseline
– Capped baseline
– Freeze baseline
• None are obviously good goals
Time for an answer
Debt Reduction
• A bipartisan consensus has developed that we
should run an overall surplus no smaller than the
off-budget surplus—that is the social security
surplus.
• Now that is a good idea.
• The important thing to notice is that even if the
budget is no greater than this there is still a
tremendous amount of debt reduction.
– Is it enough?
Spending
• Proposal: Increase spending by more than
the capped baseline scenario, though not as
rapidly as the inflated baseline
– see handout.
• Would expect government to achieve some
gains in productivity.
Taxes
• Look at handout again:
– as a share of GDP, federal taxes are as high as
they have been since WWII.
– It certainly seems feasible to reduce them, say
by about 1 percent of GDP.
• Would also be helpful for the economy
– would lower marginal tax rates.
Conclusion and summary
• We have projections of surpluses over the next 10
years of about $4 trillion.
– That is based on pretty sound assumptions.
• A balanced approach to these surpluses:
– drawing down debt by 1/2 of that.
– a spending increase for another 1/4,
– tax cut that is about 1/4
• The proportions are 2-1-1,
– Not 4-0-0 or 2-2-0
– So there is room for a good debate
The End