Budget Deficits and Surpluses
Discrepancies, either actual or structural, between government expenditures and tax revenues over a delineated period
of time.
Since the popularization of the Keynesian idea of the “fullemployment budget” (and its corollary, stabilization analysis)
in the late 1940s, the Committee on Economic Development
(CED), budget planners, and economists have emphasized
the need to gear the federal budget for full employment
(defined in terms of the nonaccelerating inflation rate of
unemployment, or NAIRU). Accordingly, budget planners
have distinguished between the actual and structural dimensions of the federal budget. Whereas the actual budget
accounts for the variation of tax revenues and transfer payments with the cyclical fluctuations of the economy, the
structural budget represents discretionary fiscal policy (that
is, the domain of tax rates, government spending on goods
and services, and transfer payments).
As a rule, actual (cyclical) deficits emerge when the economy is functioning below full employment. Under such conditions, tax revenues decrease while transfer payments (for
example, unemployment compensation and welfare benefits)
increase. In contrast, actual (cyclical) surpluses emerge when
the economy is functioning above full employment. Under
such conditions, tax revenues increase while transfer payments decrease. Finally, the actual (cyclical) budget is considered “balanced” when the economy is functioning at full
employment (NAIRU).
Setting aside the impact of cyclical economic fluctuations, the structural budget estimates the deficit or surplus
under the following conditions: the continuation of existing
spending and tax policies; the maintenance of a given trend
in gross domestic product; and the perpetuation of full
employment (NAIRU). Thus, in principle, the structural
budget can be used to anticipate the influence of government fiscal policy on the performance of the economy. In
addition, budget planners use the structural budget to assess
the extent to which increased public investment reduces private investment (a phenomenon known as the “crowdingout effect”).
Throughout the postwar period (1945–1973), the U.S.
economy operated beyond full employment. As a consequence, the United States maintained relatively negligible
actual deficits (despite the ascendancy of Keynesian economics, increased expenditures on the social programs of the
Great Society, and, ultimately, the high cost of the Vietnam
conflict). Only with the fiscal crisis of the 1970s did the
United States experience higher actual deficits. In fact, owing
to the recession of 1981–1982, tax cuts during the administration of Ronald Reagan, and the augmentation of defense
spending, the actual deficit reached unprecedented levels in
the early 1980s. Since the 1980s there has been considerable
debate on the effects—desirable and pernicious—of actual
deficits. These debates culminated in the passage of a series of
legislative initiatives designed to institutionalize a balanced
budget: the Balanced Budget and Emergency Deficit Control
Act of 1985, the Balanced Budget and Emergency Deficit
Control Reaffirmation Act of 1987, and the Budget
Enforcement Act of 1990.
Since the recession of 2001 and the terrorist attacks of
September 11, 2001, the economy has experienced difficulty.
President George W. Bush has proposed tax cuts and deficit
spending to stimulate the economy. Although a balanced
budget is ideal under normal circumstances, the domestic
and international events of the past several years have shifted
priorities.