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Podcast: The Long-Term Budget Outlook

January 27, 2010

In this podcast we will discuss the long-term budget outlook. I'm Michelle Bazie and I'm joined by the Center's Director of Federal Fiscal Policy, Jim Horney.

1. Jim, the Center issued new projections - or forecasts - of federal revenues, deficits, and debt for the long-term outlook. What were the findings?

Our paper shows virtually the same thing that every serious analysis of the long-term problem has shown, which is, if we don't change current policies in the coming decades we are going to have very large deficits and have federal debt, run up to unprecedented levels - levels that will cause serious harm to the economy.

2. Should we start reducing budget deficits right away?

No, we should not do that. The deficit problem that we are talking about is not the deficits this year and the next couple of years. Those deficits are swollen by the effects of the economic downturn and by the cost of the efforts to get the economy going again. And if we tried to cut those deficits more than they're going to come down naturally as the economy recovers, we really risk undercutting the economic recovery that's just now beginning. As big as those deficits are, they don't contribute that much to the long-term problem that we are concerned about.

3. So what can be done right now to deal with our long-term budget problems?

What is really important is for policymakers to demonstrate to the public, to the people who loan us money to finance our deficits, that we are serious about getting those deficits under control after the economy has recovered. You could take steps beginning as soon as possible to pass laws that would put those policies in place but don't have them implemented, until after the economy is recovered in a few years.

4. But, it sounds like we'll need to do much more to fully address the long-term budget problem. What else would you advise to policymakers?

The absolute key thing in getting the long-term deficits under control is slowing the rate of growth of health care cost. Now, the first step of that is enacting health care reform. But it's important to keep in mind that that legislation by itself does not do enough. We should be aware that we'll probably have to come back several times in order to take the steps necessary to get us where we need to be.

5. Two other recent reports on the long term budget outlook recommend the debt to GDP goal of 60 percent. What does this percentage mean?

What that measures is the size of the debt, the whole amount of money that the federal government has borrowed to finance all of the deficits that we face -- how large that is relative to the size of the economy. We absolutely agree with the two reports about the importance of stabilizing the debt to GDP ratio, meaning we get to a place where that debt is not constantly growing as a share of the economy. But we don't agree with the goal that they specifically set, keeping the debt to 60 percent of GDP.

6. So what's wrong with this goal of a 60 percent debt to GDP ratio? Why isn't it the best goal?

The problem with the goal of keeping the debt no more than GDP is that it's an unnecessary goal and it's overly ambitious. There's absolutely no evidence that 60 percent is somehow a magic number. More importantly, it's overly ambitious. The steps that would have to be taken in the coming years in order to keep the debt from exceeding 60 percent, I think are too large and it's likely to lead people to just throw up their hands and say we can't possibly accomplish that so we're not going to try to do anything.

7. Jim, what's a more reasonable goal?

We think you want to keep the focus firmly on the absolute necessity of stabilizing the debt at some level. And we think that to get to that point, the best thing to do is focus on getting deficits down to about 3 percent of GDP. Turns out, that if you run deficits at about 3 percent of GDP then the debt will not grow relative to the size of the economy.

8. What's the key take-away here?

We absolutely need to deal with the long-term deficit problem, it's not going to go away, and policy makers should begin as soon as possible developing a bi-partisan approach that deals both with spending and revenues and particularly focuses on getting health care under control.

Thank you for joining me, Jim.