A Fiscal Policy Update

In recent years, federal spending and deficits have declined significantly as a percent of GNP, the earlier sharp rise in the federal debt-to-GNP ratio has been halted, and the huge primary deficit (budget deficit excluding net interest outlays) has been eliminated. More progress on reducing the budget imbalance is projected, but frustration and political maneuvering has sidetracked the debate to such issues as social security and on-budget versus off-budget accounting. In addition, both the Administration and Congress are bracing for the reality that the Gramm-Rudman-Hollings (Balanced Budget Act, or GRH) deficit target of $64 billion in fiscal year 1991 will be impossible to achieve. Such concerns are unlikely to yield rational fiscal decisions. More attention must be paid to the important issues of the allocative impact of fiscal policies, and what the structure of spending and tax programs imply for the mix and level of short and long-run economic output.