NCPA - National Center for Policy Analysis

Deficits and Tax Cuts

October 20, 2003

Despite improving economic and budgetary news, there is rising pressure to do something about the budget deficit. This pressure will begin to grow rapidly over the next year and by early 2005, it will be irresistible. It is not too soon to start thinking about where this could lead, says Bruce Bartlett.

The main reason for a budget deal is that interest rates are going to rise sharply over the coming year. According to Bartlett:

  • Economic growth is accelerating; many economists expect 4 percent to 5 percent growth over the next year.
  • Inflation is likely to reemerge; for the last several years, deflation or falling prices have been the economy's biggest problem.
  • The dollar is likely to fall; the Bush Administration seems convinced that forcing other countries, especially China and Japan, to raise their currencies is the key to reducing manufactured imports and raising exports.
  • Finally, the Fed will eventually see that inflation and a falling dollar require a tightening of monetary policy. This will raise short-term rates.

These are the most important reasons why interest rates will rise. But politicians and the media are likely to focus on only one thing: the federal budget deficit. Even though serious economic research shows little impact by deficits on interest rates, all of the rise in rates will be blamed on the deficit and only the deficit. This will be hyped in the liberal media ceaselessly in order to hurt Republicans and aid the prospects of whatever Democrat gains the presidential nomination, explains Bartlett.

Source: Bruce Bartlett, "Deficits and Tax Cuts," National Center for Policy Analysis, October 20, 2003.

 

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