Saturday, March 21, 2015

Deficit Projections Are Often Way Off the Mark

The fairly modest federal deficit projected for the next few years has made fiscal discipline a less urgent policy concern than it was only a couple of years ago. But can we believe the projections? Does the fact that the deficit is projected to remain fairly small mean that the deficit is likely to remain fairly small in reality?

History indicates there is often a wide gulf between the deficit projections offered by the U.S. Office of Management and Budget, and what actually ends up happening. And that can have major implications when it comes to policy.

The deficit has shrunk considerably, and is expected to remain tame, according to recent federal budget deficit data, and projections released with the 2016 budget (see chart 1). In fiscal year 2014 the federal budget deficit was 2.8 percent of GDP. And it is projected to stay around 2.5 percent of GDP through 2020. This is close to the average deficit of 2.6 percent of GDP since 1960, and much lower than the deficit was only a few years ago, when it exceeded 8 percent of GDP.

More from the American Institute for Economic Research

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