The Shrinking Budget Gap

Will Consumers Benefit from a Lower Budget Deficit?

The Shrinking Budget Gap
February 26, 2015

You can assign the credit any way you want, but it is a fact that the budget deficit shrank significantly over President Obama’s years in office. The deficit fell to $483 billion in 2014 from the peak deficit of $1.413 trillion during the transition year of 2009. The Congressional Budget Office (CBO) projects the 2015 deficit to be $468 billion dollars, approaching the 2008 level of $458 billion.

The last three years have shown significant decreases in the $200-$300 million range per year, but that trend will be slowing in 2015, and stopping altogether in 2016. The CBO has predicted that the deficit will be relatively flat in 2016 but will start rising significantly from 2017 forward because of the massive interest required to service the national debt, as well as absorb the increased retirement of baby boomers.

How does the government intend to take advantage of this temporary dip in the budget gap? That is shaping up to be the political battle of 2015.

The Republican Congress intends to completely eliminate the deficit over the next ten years, while increasing military spending and lowering taxes, counting on a recovering economy to make up the difference.

Meanwhile, President Obama and the Democratic Party are aiming at increased government spending and tax breaks to assist lower- and middle-class families, with an emphasis on reducing inequality. The gap is to be closed by increased taxes on the wealthy and on corporations, as well as the presumed benefits of a booming economy.

CBO numbers suggest that both pictures are too rosy. The CBO predicts that economic growth will peak at 3% in 2016, and slow down to 2% throughout the 2018-2019 timeframe based on the burden produced by the retirement of baby boomers. So far this assessment seems reasonable, with 2.4% GDP growth in 2014 and general 3% growth expectations for 2015.

Given the expected slowing of growth and increasing of expenses, the CBO suggests that the annual deficit will surpass its average of 2.7% of GDP beyond 2018, and reach 4.0% of GDP by 2025 – a level believed to be unsustainable.

However, nobody in Washington is interested in who wins elections beyond 2016. Therefore, spending will increase and the effect on you, the consumer, depends mostly on who wins the short-term budget battles.

The Republican spending plan depends on overall job growth and economic growth trickling down to the consumer level. Inflation is being held in check in the short-term, so if this approach succeeds, prices are likely to remain fairly stable. Whether you benefit or not depends on whether an improving economy either gains you a job, gets you a better job, or causes wage pressures that give you a raise without sparking inflation – and, of course, whether the economy does improve beyond CBO expectations.

Under the Democratic plan, you are more likely to benefit – and benefit substantially – as a consumer if you are a lower- or middle-income American; less so if you are a wealthier American. Logically, the effect on consumers would be a slight rise in the price of staples. Prices of luxury items may decrease as fewer people can afford them.

Aside from assessing winners and losers on the consumer side, we must remember that this is still a deficit. We spend as a nation considerably more money than we have – and the interest on the debt continues to pile up as a result. We must strive toward a budget surplus and not just be satisfied with lower deficits.

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