The federal deficit is much lower now than it was a few years ago, but more adjustments in fiscal policy are needed to address the long-term deficit, says Morningstar's Bob Johnson.
Bob Johnson: This week, I want to talk about the U.S. federal budget deficit. The deficit is extremely important because it helps determine the future of interest rates and how much borrowing is going to occur from the government, which can crowd out corporate and individual borrowing. So, it's an extremely important number. And the number really got out of hand in the middle of the last recession when you can see that the deficit got as wide as 10%, which is a number that was higher than it had been in the long, long time--probably only during war had it been higher than that.
So, now we've been through the recession. We've come back. We've had the recovery. We've had some changes in fiscal policy, and that deficit now looks like in 2014 it will be down to about 2.9%, which is a very good level. It's a little bit higher than 2.2% long-term average but not very far off of it. And it should be relatively stable at that level for the next three or four years before getting a little bit worse in the 2020s as baby boomers retire.
Now, to show it graphically, some of that’s because of spending caution and some of it is because of more tax revenues. And tax revenues now are running at about 17.5% of GDP, and that’s a little bit higher than the overall 16.8% or so over history. So, a little bit higher on the revenue side. But the expenditure side is also a little bit higher. That’s averaged about 19% and will be probably a little bit over 20% overall. Combining the expenditures increases along with the revenue increases we net overall end up with a 3% deficit over the next several years and then move into the 4% levels in the 2020s.
Those higher deficit levels will begin to move the debt as a percentage of GDP upward and begin to push interest rates higher because of the crowding out effect, which would be detrimental to the economy. Hopefully, we can adjust fiscal policy in the years ahead to keep the deficit from expanding any further.
