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The U.S. Fiscal Problem: Where We Are, How We Got Here and Where We're Going

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  • Alan J. Auerbach

Abstract

This paper deals with several issues regarding the causes and implications of recent and projected U.S. federal budget deficits. It considers why deficits have remained so large in spite of deficit reduction efforts, evaluates the impact of the recent policies of the Clinton administration, and offers long-range deficit projections. Among the paper's findings are: 1. Until the past year, deficit projections over the past decade have been consistently too optimistic; had initial projections for the current fiscal year proved accurate, the deficit-reducing policies of the early 1990s already would have driven the federal budget well into surplus; there is no single explanation for these large and systematic forecasting errors. 2. The budget rules that legislators have developed to control deficits, including those now in effect, are ill-designed for their apparent purpose. They fail to compensate for forecasting errors and encourage shifts in the timing of revenues and expenditures. The paper presents evidence that such shifting has followed the incentives of the different schemes. 3. The projected decline in the deficit as a share of GDP over the next few years reflects not only the policies already enacted but also the continuation of significant real reductions in discretionary spending -- representing a drop of 2.2 percent of GDP between 1994 and 2004. 4. Even if such optimistic forecasts prove to be correct, longer run projections suggest that current fiscal policy is unsustainable. Without any growth in the relative price of health care, the

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4709.

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Date of creation: Apr 1994
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Publication status: published as Fischer, Stanley and Julio Rotemberg (eds.) NBER Macroeconomics Annual 1994. Cambridge: MIT Press, 1994.
Handle: RePEc:nbr:nberwo:4709

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  1. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
  2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  4. Jane G. Gravelle, 1993. "Estimating Long-Run Revenue Effects of Tax Law Changes," Eastern Economic Journal, Eastern Economic Association, vol. 19(4), pages 481-494, Fall.
  5. Daniel Feenberg & James Poterba, 1992. "Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns," NBER Working Papers 4229, National Bureau of Economic Research, Inc.
  6. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts - A Meaningful Alternative to Deficit Accounting," NBER Working Papers 3589, National Bureau of Economic Research, Inc.
  7. James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
  8. Gramlich, Edward M, 1990. "U.S. Federal Budget Deficits and Gramm-Rudman-Hollings," American Economic Review, American Economic Association, vol. 80(2), pages 75-80, May.
  9. Reischauer, Robert D., 1990. "Taxes and Spending Under Gramm-Rudman-Hollings," National Tax Journal, National Tax Association, vol. 43(3), pages 223-32, September.
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Cited by:
  1. Bent E. Sorensen & Lisa Wu & Oved Yosha, 1999. "Output fluctuations and fiscal policy : U.S. state and local governments 1978-1994," Research Working Paper 99-05, Federal Reserve Bank of Kansas City.
  2. Alberto Alesina, 2000. "The Political Economy of the Budget Surplus in the United States," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 3-19, Summer.
  3. Rotte, Ralph & Zimmermann, Klaus F, 1998. " Fiscal Restraint and the Political Economy of EMU," Public Choice, Springer, vol. 94(3-4), pages 385-406, March.
  4. Dharmapala, Dhammika, 2006. "The Congressional budget process, aggregate spending, and statutory budget rules," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 119-141, January.
  5. John Stephenson & Grant Scobie, 2002. "The Economics of Population Ageing," Treasury Working Paper Series 02/04, New Zealand Treasury.
  6. J. Bradford De Long, . "Keynesianism, Pennsylvania-Avenue Style: Some Economic Consequences of the 1946 Employment Act," J. Bradford De Long's Working Papers _105, University of California at Berkeley, Economics Department.
  7. John Janssen, 2001. "New Zealand's Fiscal Policy Framework: Experience and Evolution," Treasury Working Paper Series 01/25, New Zealand Treasury.

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