NCPA - National Center for Policy Analysis

Deficit Spending

April 28, 2011

The federal government ran record peacetime budget deficits in fiscal years 2009 and 2010, 10 percent and 9 percent of gross domestic product (GDP), respectively, and anticipated another deficit of 10 percent in 2011.  The federal government's borrowing in 2009 and 2010 took up amounts equal to 60 percent and 49 percent of the economy's gross private savings, respectively.  The dollar volume of federal debt held by the public doubled between the end of September 2007 and the end of December 2010. The ratio of debt to GDP reached 62 percent, the first time the federal-debt-to-GDP ratio had exceeded 50 percent since just after World War II, says Lawrence H. White, a professor of economics at George Mason University. 

  • A large share of the federal debt growth in 2007-2010 was cyclical, due to a deep recession that reduced federal revenues and automatically triggered some additional spending.
  • But a sizable part of the debt growth was non-cyclical or structural, as indicated by the federal budget having been in deficit for 36 out the most recent 40 years.
  • By 2020, debt would equal nearly 90 percent of GDP;after that, the growing imbalance between revenues and noninterest spending, combined with the spiraling cost of interest payments, would swiftly push federal debt to unsustainable levels.
  • Debt held by the public would exceed its historical peak of about 110 percent of GDP by 2025 and would reach about 180 percent of GDP in 2035.

A growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates, says White.

Source: Lawrence H. White, "From Pleasant Deficit Spending To Unpleasant Sovereign Debt Crises," Mercatus Center, April 2011.

 

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