In a Working Paper on medium-term trends in US public finances, the economists at Allianz and Dresdner Bank forecast an average budget deficit of 3 % of GDP over the next ten years. A drop below 4 % is not on the cards before 2008, assuming continuation of the current fiscal policy and the planned reforms of the alternative minimum tax and pension insurance. The key factors behind this are the ongoing rise in defense spending and the tax cuts of recent years.
US budget: Deep-red outlook
By contrast, the trend in public finances over the past three years is relatively benign. For one thing, the current deficit is not unusually high in historical terms. For another, given the imbalances in the private sector prevailing in 2000, without resolute countermeasures on the part of US finance policy we would have seen a deep recession or at least a long phase of stagnation. In such a scenario there would have been a swing from a 1.9 % surplus to a deficit of 0.8 % of GDP. This corresponds to almost 60 % of the actual deterioration in the federal budget. Nonetheless, talk of a "cyclical deficit" misses the point, as this implies a rapid improvement in the deficit picture once the economy turns up. But this is not on the cards.