Deficits, Debts and Growth : A Reprieve But Not a Pardon

The paper argues in favor of significant budget deficits based on the understanding that the expansion of the 1990s was fueled by a great build-up of debt, and that this would eventually give way to a severe recession unless offset by a strong fiscal stimulus. In 2001, with the total government budget still in surplus the real annual growth rate fell from 3.7 percent in 2000 to essentially zero percent in 2001. But then, through a combination of tax cuts and war expenditures, the overall government balance underwent a sharp reversal from a surplus of 1.5 percent to a deficit of about 4.5 percent. In this Strategic Analysis paper the effects of the reversal of the US fiscal stance are analyzed and various macro simulations are performed to show the macro policy implications in the intermediate run