This brief report outlines some possible macroeconomic implications of observing a statutory or constitutional commitment to balance the Federal budget. It does not address the legal questions about the proposal or their implementation, nor the economic and political questions related to decisions about the level of Federal revenues or expenditures. On the latter, its analysis refers to revenue and expenditure levels, in relation to total national product, typical of recent years.
Projections of deficits in excess of $200 billion a year through 1990 and beyond have raised considerable concern about the economic damage they will cause. Yet, many find it hard to describe exactly what harm deficits will bring, or how such harm will come about. This report provides a brief qualitative description of what economic analysis suggests that large deficits will do to the economy, and what the likely consequences of their reduction will be.
Projections of deficits in excess of $200 billion a year through 1990 and beyond have raised considerable concern about the economic damage they will cause. Yet, many find it hard to describe exactly what harm deficits will bring, or how much harm will come about. This report provides a brief qualitative description of what economic analysis suggests that large deficits will do to the economy, and what the likely consequences of their reduction will be.
In 1981 Congress enacted extensive changes in taxing and spending policies that supporters of these changes expected to generate sufficient revenues, despite a series of tax rate cuts, to balance the budget by FY84. After the onset of recession in early 1982, however, the Reagan Administration's projections showed widening budget deficits, which culminated in an actual FY83 deficit of $195.4 billion. Despite enactment of the Tax Equity and Fiscal Responsibility Act of 1982, and, more recently, the Deficit Reduction Act of 1984, large deficits are expected to persist, even under continued favorable economic conditions, unless Federal taxing and spending policies are altered dramatically.
The United States is now running a deficit of over $100 billion in its foreign trade and the Federal budget is in the red by roughly $200 billion. To deal with these two deficits, Congress is considering a temporary import surcharge. This brief examines the case for and against such a surcharge as well as its use against Japan.
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