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Tl<)/; i'U/le^ or-J**r j uuJ h:> l/z/o- /*>- /^ <L Tt f S FEDERAL BUDGET TRENDS AND A FRAMEWORK FOR ANALYZING DEFICITS AND DEBT Jerry L. Jordan, President Federal Reserve Bank of Cleveland May 17,1993 SECTION 1 FEDERAL BUDGET TRENDS: 1969-PRESENT Federal Budget as a % of GDP 1969 Expenditures Defense N-def, disc. Transfers Net interest 19.5 8.9 4.2 5.3 1.1 Revenues 19.9 Deficit -0.4 Primary deficit -1.2 Federal Budget as a % of GDP 1969 Expenditures Defense N-def, disc. Transfers Net interest 1979 19.5 20.3 8.9 4.8 4.2 5.1 5.3 9.1 1.1 1.4 Revenues 19.9 18.7 Deficit "0.4 1.6 Primary deficit -1.2 0.5 Federal Budget as a % of GDP 1969 Expenditures Defense 1979 19.5 1981 20.3 22.4 8.9 4.8 5.3 N-def,disc. 4.2 5.1 5.1 Transfers 5.3 9.1 10.2 1.1 1.4 i Net interest 8 Revenues 19.9 18.7 19.8 Deficit "0-4 1.6 2.6 Primary deficit -1.2 0.5 1.1 Federal Budget as a % of GDP 1981 Expenditures Defense N-def, disc. Transfers Net interest Revenues 1986 22.4 23.0 5.3 6.5 5.1 3.9 10.2 9.8 1 .8 2.7 19.8 17.8 Deficit 2-6 5.2 Primary deficit 1.1 3.0 Federal Budget as a % of GDP 1981 Expenditures Defense N-def, disc. Transfers Net interest Revenues 1986 22.4 1989 23.0 21.7 5.3 6.5 5.9 5.1 3.9 3.6 10.2 9.8 9.4 1.8 2.7 2.9 19.8 17.8 18.8 Deficit 2.6 5.2 2.9 Primary deficit 1.1 3.0 0.6 Federal Budget as a % of GDP 1986 Expenditures Defense 1989 23.0 1992 21.7 23.1 6.5 5.9 5.1 N-def, disc. 3.9 3.6 4.0 Transfers 9.8 9.4 11.0 Net interest 2.7 2.9 3.1 Revenues 17.3 18.8 18.2 Deficit 5.2 2.9 4.9 Primary deficit 3.0 0.6 2.5 The Composition of Federal Outlays, 1969-1992 % Of GDP 25 20 15 10 1969 1972 1975 1978 1981 1984 1987 1990 Federal Budget as a % of GDP Bush/Baseline Administration 1992 Expenditures Defense N-def, disc. Transfers Net interest Revenues 1998 23.1 1998 21.9 22.4 5.1 3.5 3.2 4.0 3.0 4.0 11.0 11.9 11.9 3.1 3.5 3.3 13.2 18.1 19.5 Deficit 4.9 3.8 2.9 Primary deficit 2.5 1.0 0.2 SECTION 2 A FRAMEWORK FOR ANALYZING DEFICITS AND DEBT EXAMPLE 1 GDP Debt Debt/GDP (Billionsof $) Year 1 Increase Year 2 $6,000 $6,000 10% 10% $6,600 $6,600 1.0 1.0 EXAMPLE 2 GDP Debt Debt/GDP (Billions of $) Year 1 Increase Year 2 $6,000 $6,000 10% 8% Interest rate 2% Primary deficit/debt $6,600 $6,600 1.0 1.0 EXAMPLE 3 GDP Debt Debt/GDP (Billions of $) Year 1 Increase Year 2 $6,000 $4,000 6% 4% Interest rate 4% Primary deficit/debt $6,360 $4,320 0.67 0.68 APPENDIX ARE ASSERTIONS ABOUT NATIONAL BANKRUPTCY IN THE SHORT-RUN VALID? Component Rates of Growth for Total Federal Debt (1) (2) (3) (4) Year Effective Net Interest Primary Deficit/Debt Growth of Debt (1)+(2) Growth of GDP 1983 5.6% 10.2% 15.8% 8.1% 1990 4.1 1.7 5.8 5.2 1992 3.4 4.8 8.2 6.0 Federal Budget as a % of GDP 1992 Expenditures Defense N-def, disc. Transfers Net interest Revenues Grace Comm. Bush/Baseline 1995 1995 23.129.5 5.1 4.0 4.0 3.7 11 .o 11.3 3.1 33 18.2 Deficit 4.9 Primary deficit 2.5 22.3 18.6 18.4 10.9 3.9 1.2 Grace Commission Projections Trillions of $ Projections Using Current Growth Rates Trillions of $ Current and Projected Component Rates of Growth For Total Federal Debt (1) Year Effective Net Interest 1992 1998 (Bush/baseline) (2) Primary Deficit/Debt (3) Growth of Debt (4) (1)+(2) Growth of GDP 3.4% 4.8% 8.2% 6.0% 4.1 1.2 5.3 5.9 0.3 3.7 5.5 1998 3.4 (Administration) Long-term Policy Concerns Eligibility for entitlements due to demographics * Social Security • Medicare and Medicaid Declining saving and investment Temptation to reinflate Is It Adequate to Focus on Deficits and the National Debt? Deficits and debt levels are too aggregative and only partially reflect the stance of fiscal policy. Need to evaluate the allocative and incentive effects of policies on a case-by-case basis: * Social Security versus worker retraining programs. • Medicare outlays versus AFDC payments. * Investment tax credits versus educational grants. • Income tax hikes versus spending reductions. Marginal changes would have real economic consequences, but may not be reflected in deficits.