- The Washington Times - Sunday, December 1, 2002

After several years of surpluses, the federal budget moved into deficit last fiscal year. The 2002 deficit was $159 billion. By any standard, a deficit of this size was as reasonable as it was affordable.
Relative to the size of the economy, the 2002 deficit came in at 1.5 percent of gross domestic product (GDP), which represents the nation's total economic output. From 1980 through 1995 before the newly elected Republican Congress began to enforce some spending restraint and before the stock-market bubble began generating tens of billions of dollars in unprecedented capital-gains tax revenues the annual federal budget deficit averaged 3.8 percent of GDP, never falling below 2.2 percent.
Relative to other industrial nations, the U.S. budget deficit is quite small. Japan's estimated budget deficit for 2002 is 8 percent of GDP, more than five times the U.S. level. Germany's deficit will almost certainly exceed 3 percent, or twice the U.S. level, and France's budget deficit will be at least 2 percent of GDP.
In an era of expanding international terrorism that has been responsible for murdering French and German citizens as well as Americans, it's worth noting that these two countries have incurred significantly higher deficits while spending vastly fewer relative resources for defense. According to the 2001-02 edition of the Military Balance, a defense encyclopedia compiled by the authoritative International Institute for Strategic Studies (IISS), France and Germany spent about 1.9 percent and 1.1 percent of GDP, respectively, on defense in 2001. For fiscal 2002, the U.S. defense budget totaled 3.2 percent of GDP. If Germany's defense spending were comparable to America's, its budget deficit would exceed 5 percent of GDP. Japan, of course, spends well below 1 percent of its GDP for national defense. Indeed, the $41 billion increasein U.S. defense spending in fiscal 2002 was more than 60 percent higher than France's total projected defense spending of $25.3 billion for 2001 and was virtually double Germany's total projected defense spending of $21 billion for 2001, according to the IISS.
The U.S. budget deficit of $159 billion for 2002 was the result of truly extraordinary circumstances. Those circumstances began with the nation's immediate response to September 11; included the prosecution of war in Afghanistan; incorporated the beginning of a long overdue defense build-up; financed the preparation for a potential war with Iraq; included the second installment of the most well-timed countercyclical tax cut in postwar history; and manifested Congress' bipartisan propensity to overspend on domestic programs.
The 2002 deficit was also the product of an economy slowly recovering from a recession; during fiscal 2002, the unemployment rate increased to 5.7 percent from 4.4 percent in 2001. Unemployment benefits increased more than 70 percent to $55 billion. Meanwhile, receipts from individual-income taxes dramatically declined by 13.7 percent, falling from $994 billion in 2001 to $858 billion in 2002. Three-quarters of that shortfall was attributable to factors unrelated to the tax cut. Most likely, when all the data are examined, most of the historic shortfall will represent a further collapse of capital-gains tax revenues and continued economic weakness. How historic? Since 1950, at no time did receipts from individual taxes collapse from one year to another in any way comparable to the 13.7-percent plunge from 2001 to 2002. The two largest declines before 2002 were 2.9 percent in 1983 and 4.6 percent in 1971. Even in fiscal 1991, which included six of the eight months of the 1990-91 recession, receipts from individual taxes increased from the 1990 level.
Placed in its proper perspective, the $159 billion deficit for fiscal 2002 was in no way out of line. In fact, the fiscal effect that the deficit had upon the economy, small though it may have been, at least had the benefit of being in the right direction at the right time. And that is worth keeping in mind as Washington contemplates the size and shape of the fiscal stimulus package.


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