Deficit who is responsible

It involves congressional horse-trading, partisan posturing, and technical tricks that affect billions of dollars. It is also a story of politicians operating within constraints set by both public opinion and political interpretation of economic reality.

Though budgeting has always been important, its impact on the national agenda has grown dramatically. Based on documentary sources and extensive interviews with participants, The Deficit and the Public Interest explains how budgeting works so the reader can see what is at stake in seemingly arcane disputes. It also explains the relationship of the budget to the media as well as to party and policy activists and explores the ways in which the deficit represents a crisis of confidence in our institutions, preeminently Congress and the presidency.

Along the way, it provides a uniquely comprehensive account of the entire budget problem, exploring Gramm-Rudman, tax reform, and the continuing political gridlock. In , the deficit would be 3. The weak economy also plays a major role in the deficit picture. When the economy contracts, tax revenues decline and outlays increase for programs designed to keep people from falling deep into poverty with the tax impact much larger than the spending impact.

All told, the weak economy is responsible for 20 percent of the fiscal problems we face in and The American Recovery and Reinvestment Act, designed to help bring the economy out of the recession is, by far, the largest single additional public spending under this administration. The cumulative cost of the financial sector rescue, mostly initiated under President Bush in response to the financial markets collapse, is also significant—contributing to 12 percent of the problem.

A variety of other changes, described in the methodology section, are also contributors. Much will depend on how the economy fares. If the Bush tax cuts, scheduled to expire at the end of , were to be continued in their entirety there would be large deficits. There are a number of similar budget items that have a long history for which one can, with equal legitimacy, assign responsibility to either their originators or current policymakers for continuing them. The administration has insisted that its additional spending, especially on health care, be fully paid for with savings elsewhere in the budget and additional revenues.

In fact, to address our budget challenges it is critical to reform health care which, through Medicare, Medicaid, and other programs, is the single biggest budget headache in the long run. Regardless of responsibility, of course, the long-run deficit situation is one that needs to be addressed. Today's deficits are an aberration, unfortunately: both pro-cyclical and permanent.

Running large deficits when the economy is already strong means that any boost provided to the economy will be temporary, and may put unnecessary upward pressure on inflation and interest rates. Running permanent deficits means that they will increasingly hurt investment and growth over time. They cannot simply be waited out. Rising deficits are largely driven by the increasing cost of interest and health and retirement programs, which are caused by rising health care prices and an aging population.

Yet even with these factors, deficits were on course to decline over the next couple years before Congress enacted fiscally irresponsible tax cuts and spending hikes. Proactive policy action will be needed to turn the situation around.

As John F. Importantly, these projections reflect only the direct budgetary effects of the American Rescue Plan Act and do not incorporate any potential indirect economic effects. In our assessment, the plan is likely to boost GDP, taxable income, inflation, and interest rates in the near-term relative to CBO's prior projection.

On net, these effects could reduce our deficit projections by several hundred billion dollars over the next five years.