Search Penny Hill Press

Sunday, January 24, 2010

CRS Issue Statement on Budget Deficit and National Debt

Marc Labonte, Coordinator
Specialist in Macroeconomic Policy

D. Andrew Austin
Analyst in Economic Policy

Thomas L. Hungerford
Section Research Manager

Brian W. Cashell
Specialist in Macroeconomic Policy

Justin Murray
Information Research Specialist

Craig K. Elwell
Specialist in Macroeconomic Policy

Mindy R. Levit
Analyst in Public Finance

The budget deficit equaled $1.4 trillion in FY2009, compared with $455 billion in 2008. Under current policy, it is projected to remain nearly that large in 2010. As a share of gross domestic product (GDP), the 2009 deficit was the largest since World War II. A deficit this large is unsustainable in the long run in the sense that maintaining it would cause the national debt to grow continuously as a share of GDP. According to mainstream economic theory, the deficit has a negative effect on the economy in the long run through effects on interest rates, national saving, and the trade deficit, but in the short-run economic theory also suggests that it can mitigate a deep recession. The policy dilemma is in the timing—reducing the deficit before investors become concerned about sustainability, but not so soon that it exacerbates the recession or stifles out an incipient recovery. In the long run, the deficit is projected to grow under current policy as entitlement spending increases relative to GDP. Official baseline projections of the deficit are likely to be biased downward due to formulaic assumptions.

Date of Report: January 12, 2010
Number of Pages: 3
Order Number: IS40261
Price: $7.95

Document available electronically as a pdf file or in paper form.
To order, e-mail or call us at 301-253-0881.