Alan J. Gale Friday, September 1, Not all budget deficits are bad—indeed, recent deficits accelerated recovery from the recession that began in But longer-term deficits of the current magnitude are harmful for five reasons:. They slow economic growth. They increase household borrowing costs. Eberly and James H. They increase indebtedness to foreigners, which is both expensive and risky.
The United States is the largest net debtor in the world. The income of Americans will ultimately be reduced by the interest, dividends, and profits paid to foreigners who have invested in the United States. Moreover, if foreigners lose confidence in the American economy—or begin to worry that the United States is not managing its fiscal affairs responsibly—they may reduce their investment. This can decrease the value of the dollar and raise the prices we have to pay for imported goods.
One out of every five tax dollars will need to be set aside for this purpose. They impose enormous burdens on future generations. This shift in federal finances from deficit to surplus would not be a serious concern if it were temporary. These projections are based on those of the Congressional Budget Office CBO , but they assume that the tax cuts enacted in recent years are made permanent, as the president has proposed, and that Congress will amend the alternative minimum tax AMT to prevent an increase in the number of taxpayers subject to the AMT.
They also assume discretionary spending increases in line with population growth as well as with inflation—that is, real discretionary spending per person is held constant—and include the cost of the prescription drug benefit and other changes in Medicare enacted at the end of the first session of the th Congress.
Alice M. A major additional reason for concern about continuous large deficits is that pressures on the budget are certain to escalate rapidly as the baby boom generation retires and longevity continues to increase.
The CBO projects that even if medical care costs rise only 1 percent faster than per capita GDP—an optimistic assumption in view of recent increases—expenditures for providing existing benefits under Social Security, Medicare, and Medicaid would rise from 9. These exploding future costs highlight the need to address the challenge of reforming these entitlement programs as soon as possible.
They also make clear the importance of fiscal policy that contributes to future economic growth by enhancing national saving—not reducing both growth and saving by running continuous deficits over the coming decade. Deficits are very sensitive to the rate of economic growth.
Should the economy grow faster than the 3 percent rate, in real terms, assumed by the CBO and most private forecasters, deficits will be smaller. If the economy grows more slowly than this, they will be still larger. Some believe that recent changes in tax law will lead to higher rates of economic growth. But as long as these tax cuts are deficit financed, the weight of professional opinion suggests that they will not lead to higher growth. If the recovery continues and the economy performs well, the deficit should decline for this reason alone.
However, many analysts are skeptical that it will decline as much as the administration predicts. The full costs of the wars in Afghanistan and Iraq are not included. The AMT that will hit millions of middle class families with higher tax bills over the next five years is not fixed.
But even if some combination of policy actions and a strong economy reduces deficits over the next few years, they are almost certain to balloon again after that; and the administration has no long-term plan for restoring fiscal balance. By itself, the amendment cannot resolve these underlying policy differences. Although a balanced budget amendment could set a standard that elected officials would not want to miss, there are also legitimate concerns about how it would operate in practice.
We all have a responsibility to build a brighter fiscal and economic future for the next generation. National Debt Clock See the latest numbers and learn more about the causes of our high and rising debt. Skip to main content. Balanced Budget Amendment: Pros and Cons. State officials certainly take an obligation to balance the budget seriously, and in the debate over a federal balanced budget in the early- and mids, much of the discussion centered on the states' with balanced budgets.
This article is concerned with the nature, definition and eforcement of state balanced-budget requirements. Nature of state balanced-budget requirements All the states except Vermont have a legal requirement of a balanced budget. Some are constitutional, some are statutory, and some have been derived by judicial decision from constitutional provisions about state indebtedness that do not, on their face, call for a balanced budget. The General Accounting Office has commented that "some balanced budget requirements are based on interpretations of state constitutions and statutes rather than on an explicit statement that the state must have a balanced budget.
The requirements vary in stringency from state to state. In some states the requirement is that the introduced budget be balanced, or that the enacted budget be balanced. In other states policymakers are required to ensure that expenditures in a fiscal year stay within the cash available for that fiscal year. Other states may carry unavoidable deficits into the next fiscal year for resolution.
Such provisions can be either constitutional and statutory, but are more rigorous if they are constitutional since they are not subject to legislative amendment.
Some states have two or all three of the possible balanced-budget requirements, and a few have only a statutory requirement that the governor submit a balanced budget. Weighing such considerations against one another, one federal study concluded that 36 states have rigorous balanced-budget requirements, four have weak requirements, and the other 10 fall in between those categories.
What has to be balanced? State balanced budget requirements in practice refer to operating budgets and not to capital budgets. Operating budgets include annual expenditures--such items as salaries and wages, aid to local governments, health and welfare benefits, and other expenditures that are repeated from year to year.
State capital expenditure, mainly for land, highways, and buildings, is largely financed by debt. Court decisions and referendums on borrowing have led to the exclusion of expenditures funded by long-term debt from calculations whether a budget is balanced.
In practice, the following kinds of state revenues and expenditures also have little impact on state balanced budgets:. In each case, it is practically impossible for revenues and expenditures to get out of balance, since expenditures are controlled by available funds. Thus it is not surprising that the focus of "balancing the budget" tends to be on the general fund although general fund expenditures compose only 50 percent to 60 percent of total state spending.
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