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Friday, May 20, 2011

Bush Tax Cuts, Wars Major Drivers of Projected Government Debt

The CBPP looks at the source of the public debt (previous charts have examined the source of deficits, i.e. the deficit or surplus in a given year, this looks at the debt which is the accumulation of all past deficits and surpluses). As this notes, "simply letting the Bush tax cuts expire on schedule ... would stabilize the debt-to-GDP ratio for the next decade." We are on the verge of trading tax cuts for the wealthy and spending on wars for large cuts to social programs (the budget hole the recession caused is helping to fuel the calls for austerity). Maybe that's what we want, maybe not (and likely not if the polls are correct), but we ought to at least be more aware than we seem to be that this is the trade we are making:

What’s Driving Projected Debt?, CBPP: As we’ve noted, my colleagues Kathy Ruffing and Jim Horney have updated CBPP’s analysis showing that the economic downturn, President Bush’s tax cuts, and the wars in Afghanistan and Iraq explain virtually the entire federal budget deficit over the next ten years.  So, what about the public debt, which is basically the sum of annual budget deficits, minus annual surpluses, over the nation’s entire history?
The complementary chart, below, shows that the Bush-era tax cuts and the Iraq and Afghanistan wars — including their associated interest costs — account for almost half of the projected public debt in 2019 (measured as a share of the economy) if we continue current policies.

Tax Cuts, Wars Account for Nearly Half of Public Debt by 2019

Altogether, the economic downturn, the measures enacted to combat it (including the 2009 Recovery Act), and the financial rescue legislation play a smaller role in the projected debt increase over the next decade.  Public debt due to all other factors fell from over 30 percent of GDP in 2001 to 20 percent of GDP in 2019.
We focus here on debt held by the public, which reflects funds that the federal government borrows in credit markets to finance deficits and other cash needs.  That’s the proper measure on which to focus because it’s what really affects the economy.  We compare it to GDP because stabilizing the debt-to-GDP ratio is a key test of fiscal sustainability.
As Kathy and Jim note, simply letting the Bush tax cuts expire on schedule (or paying for any portions that policymakers decide to extend) would stabilize the debt-to-GDP ratio for the next decade.   While we’d have to do much more to keep the debt stable over the longer run, that would be a huge accomplishment.

    Posted by on Friday, May 20, 2011 at 09:45 AM in Budget Deficit, Economics | Permalink  Comments (55)

          


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