Tags: Wharton | deficit | healthcare | GDP

Wharton Experts: Federal Deficit to Return Even Larger

By    |   Thursday, 26 September 2013 08:07 AM

The recent drop in the federal deficit is only temporary. The deficit will come roaring back larger than ever, according to experts at Wharton School at the University of Pennsylvania.

The Congressional Budget Office (CBO) estimates this year's federal budget deficit will drop to $642 billion, or from 10.1 percent of GDP in 2009 to 4 percent of GDP.

However, the drop is due to passing factors, Wharton experts told Knowledge@Wharton, the school's online business journal.

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"This is a thin — and transitory — silver lining on a very dark cloud," notes Olivia Mitchell, Wharton business economics and public policy professor. "Deficits are projected to ramp up again over the next decade."

The CBO says the deficit declined because of government spending cuts from sequester, the capital gains tax increases and higher-than-expected revenues such as payments from Fannie Mae and Freddie Mac.

The CBO projects the deficit will continue falling to 2.1 percent of GDP by 2015, but then will increase to 3.5 percent of GDP by 2023, compared with the average 3.1 percent of GDP over the past 40 years, noted Knowledge@Wharton.

The aging population will stress Medicare and Social Security. The number of people 65 or older will increase by 90 percent, while those aged 20 to 64 will increase by only 10 percent.

Wharton experts question if healthcare costs, which dropped this year, will continue falling. However, other experts think healthcare spending will continue decline.

"The healthcare system is so inefficient and there are so many opportunities to reduce spending — this could be just the tip of the iceberg," said Mark Duggan, a business economics professor at the Wharton Public Policy Initiative.

The U.S. and world economy could face "catastrophic results" unless Washington acts, Wharton finance professor Itay Goldstein told Knowledge@Wharton.

"The basic perception is that the U.S. has a strong economy, and its debt is more or less under control," Goldstein said. "But if you keep growing your debt, market participants might lose confidence. If they think the chance that their debt will get paid back is low, interest rates will be higher, and then it’s difficult to pay back the debt. It becomes self-fulfilling."

New York Times columnist Paul Krugman asserts there is no deficit problem. Revenues rise and spending naturally falls as the economy goes through business cycles, he explained. Plus, we only need to ensure that debt grows slower than GDP, not balance the budget.

The deficit is projected to increase later this decade due to an aging population. But there's no good reason to cut spending now, while the economy remains poor, to address a problem we may face years from now, he wrote in his column.

Editor’s Note: Add Up to $152,046 to Your Social Security Benefits Using Weird Trick

Related Stories:

Budget Deficit Shrinks 35 Percent From Last Year

Higher Treasury Interest Rates May Darken Deficit Outlook

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Economy
The recent drop in the federal deficit is only temporary. The deficit will come roaring back larger than ever, according to experts at Wharton School at the University of Pennsylvania.
Wharton,deficit,healthcare,GDP
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2013-07-26
Thursday, 26 September 2013 08:07 AM
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