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The expected federal budget surplus: how much confidence should the public and policymakers place in the projections?

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  • Kevin L. Kliesen
  • Daniel L. Thornton

Abstract

When the government runs a deficit, it can borrow from the public—that is, it can create debt. Conversely, when the government runs a surplus, it can retire that debt. For the past three years, the federal government has recorded budget surpluses, and both the White House Office of Management and Budget and the Congressional Budget Office project that these surpluses will increase for at least the next decade. If these projections prove to be accurate, the $3.5 trillion of publicly held federal debt could be eliminated by around 2010. This article, which was written prior to the updated estimates published in January 2001, assesses the likelihood that these projected surpluses will materialize, and consequently eliminate the public debt, by comparing previous budget projections with actual outcomes. The authors show that the long-term budget projections have not provided a useful indicator of actual experience. Principally, these errors occur because of changes in macroeconomic conditions or unforeseen legislative actions, which both result in unanticipated increases or decreases in revenues or outlays. Not surprisingly, the projections have proven to be less reliable the longer the projection horizon. Moreover, over the period of available data, the projections have been biased upward, i.e., the actual deficits have been larger than projected. Accordingly, the authors suggest that prospects for eliminating the public debt may be overstated.

Suggested Citation

  • Kevin L. Kliesen & Daniel L. Thornton, 2001. "The expected federal budget surplus: how much confidence should the public and policymakers place in the projections?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 11-24.
  • Handle: RePEc:fip:fedlrv:y:2001:i:mar:p:11-24:n:v.83no.2
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    References listed on IDEAS

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    1. Alan J. Auerbach, 2000. "Formation of fiscal policy: the experience of the past twenty-five years," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 9-23.
    2. Kasten, Richard A. & Weiner, David & Woodward, G. Thomas, 1999. "What Made Receipts Boom and When Will They Go Bust?," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 339-348, September.
    3. David L. Reifschneider & Robert J. Tetlow & John Williams, 1999. "Aggregate disturbances, monetary policy, and the macroeconomy: the FRB/US perspective," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-19.
    4. Kasten, Richard A. & Weiner, David & Woodward, G. Thomas, 1999. "What Made Receipts Boom and When Will They Go Bust?," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 339-48, September.
    5. Robert H. Rasche, 1985. "Deficit projections vs. deficit forecasts," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul5.
    6. David E. Altig, 2000. "Fiscal policy and fickle fortunes: what’s luck got to do with it?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
    7. Jagadeesh Gokhale, 2000. "Generational Accounts for the United States: An Update," American Economic Review, American Economic Association, vol. 90(2), pages 293-296, May.
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    Cited by:

    1. Doug Hostland, "undated". "Fiscal Planning in an Era of Economic Stability," Working Papers-Department of Finance Canada 2003-10, Department of Finance Canada.
    2. Tatom, John, 2005. "Deficits and the Economy: All Deficits Are Not Created Equal," MPRA Paper 4118, University Library of Munich, Germany.
    3. David C. Wheelock, 2002. "Conducting monetary policy without government debt: the Fed's early years," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-14.

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    Keywords

    Budget ; Fiscal policy ; Expenditures; Public;

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