From the Desk of Bob Caldwell

What the Lower Deficits Mean

Some good news was released by the Congressional Budget Office in the past few weeks. The astronomically high U.S. budget deficit is coming back down to earth this year. During the depths of the recession, the budget deficit approached $1.5 trillion and represented over 10% of the size of the U.S. economy. The deficit is falling sharply this year and is expected to come in below $640 billion and just over 5.0% of the size of the economy. The deficit is projected to shrink through 2015. Is this good news? Absolutely. In the long run, lower deficits will translate into lower interest rates and less pressure to raise taxes. Keep in mind that today's rates are artificially low because of stimulus activity by the Federal Reserve Board. Thus, the rates we are talking about are in the long run. In addition, lower deficits pave the way for additional growth in the private sector.

The bad news is that the deficits are not projected to shrink forever. By the end of the decade, the government red ink will start growing again because of growth in entitlement spending as the age of the average American gets older. The good budget news this year is due to a rebounding economy and the end of stimulus and war spending. But the fundamental problems do not go away. And because the lower deficit delays the need for Congressional action on raising the debt ceiling until later in the year, there is no sense of urgency to fix the long-term problem. In other words, lower deficits are great news for the economy in the long run, but the precipitous drop in the shortfall is masking the real long-term issues.

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"From the Desk of Bob Caldwell" Blog, Copyright 2013 Bob Caldwell