Economy and Jobs Watch: Cyclically Adjusted Deficit Reaches Record High

The cyclically adjusted deficit -- that is, the deficit adjusted to remove economic fluctuations -- reached an all-time high of $374 billion in 2004 according to a new report by the Congressional Budget Office. As a share of the overall economy, the cyclically adjusted deficit at 3.2 percent of GDP is at its highest levels since the early 1990's -- and has been exceeded in only 7 of the last 42 years (see chart below.)

When the economy fluctuates so do the finances of the federal government. In particular, during times of recession, tax revenue tends to decline, and spending tends to automatically increase -- thus increasing the deficit (or decreasing a surplus). Government finances are in part determined by these "cyclical" factors. The other part is determined by tax and budget policy decisions made by the president and Congress. The Congressional Budget Office (CBO) is able to analyze the historical pattern of the nation's finances to distinguish which components of the deficit that are: a) due to the cyclical factors and b) due to non-cyclical policy decisions.

In their most recent report on the topic, the CBO found that just 11 percent of the deficit in 2004 was due to cyclical factors -- leaving the remaining 89 percent of the deficit as a result of policy decisions, and not cyclic economic factors. The size of the cyclically adjusted deficit is projected to grow by $89 billion to $374 billion -- an increase of 31 percent in just the past year.

These numbers indicate that the current deficit is "structural" and will not simply go away when the economy recovers. The fundamental cause of this imbalance seems clear -- over the last couple years, federal revenues have remained at their lowest level as a share of the economy since the 1950's. What is needed is a policy change that raises adequate revenue to responsibly fund our nation's priorities -- and current policy is not living up to that test.

 

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