Economic Review

1985

 
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Nov/Dec, 1985

CBO and OMB Projections, Adjusted for Inflation, Show Federal Budget Deficit under Control

William G. Dewald

Federal budget deficits continue to dominate discussions of the short-term economic future of the United States. This article by William G. Dewald stands in stark contrast to the aura of pessimism that pervades most such discussions.

Dewald's optimism derives from the inflation adjustment factors he applies to the CBO and OMB deficit projections based on the 1986 Congressional Budget Resolution. He insists that pessimism about deficits stems from a tendency to focus on nominal rather than real (i.e., inflation-adjusted) deficits. Inflation mitigates the burden of a given nominal deficit in two ways: first, it lowers the real interest rate that the government pays, and second, it reduces the real value of publicly held government debt. Dewald claims that if the Budget Resolution is implemented, then by 1990, the ratio of inflation-adjusted publicly held debt to GNP will begin to decline, and the real deficit will be eliminated.



Our Research Focus: Inflation & Monetary Policy

Topics: Inflation
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