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The Deterioration in the US Fiscal Outlook, 2001-2010

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  • Jeffrey B. Liebman

Abstract

From 1999 to 2001, US budget surpluses averaged 2% of GDP. By 2011, the Congressional Budget Office was projecting persistent "current policy" budget deficits exceeding 6% of GDP, even after the economy recovered from the recession. This paper reviews the remarkable deterioration in the US fiscal outlook. It shows that more than half of the deterioration occurred before the 2007-9 recession, as a combination of tax cuts, increased spending, and worse than expected economic performance shifted the budget from surplus to deficit. The further deterioration since 2007 has two main components. Spending on Medicare, Medicaid, and Social Security is projected to increase by almost 3% of GDP over the first 10 years of baby boomer retirements, and interest costs are rising both because of the underlying fiscal imbalance and also as a result of the recession. The paper also discusses proposals for reducing the deficit, longer-term fiscal challenges, and the political economy of fiscal reform.

Suggested Citation

  • Jeffrey B. Liebman, 2013. "The Deterioration in the US Fiscal Outlook, 2001-2010," Tax Policy and the Economy, University of Chicago Press, vol. 27(1), pages 1-18.
  • Handle: RePEc:ucp:tpolec:doi:10.1086/671242
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    1. von-Hagen, Jurgen, 2006. "Fiscal Rules and Fiscal Performance in the European Union and Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(1), pages 25-60, March.
    2. Robert E. Hall & Charles I. Jones, 2007. "The Value of Life and the Rise in Health Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 39-72.
    3. von Hagen, Jürgen, 2005. "Fiscal Rules and Fiscal Performance in the EU and Japan," CEPR Discussion Papers 5330, C.E.P.R. Discussion Papers.
    4. Martin Feldstein & Daniel Feenberg & Maya MacGuineas, 2011. "Capping Individual Tax Expenditure Benefits," NBER Working Papers 16921, National Bureau of Economic Research, Inc.
    5. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 233-297.
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