July 23, 2014

Structural Deficits Pose Many Risks

  • The federal budget is an expression of our country's values. Where we choose to spend and at what levels, how and who we tax, and the borrowing we...

As elected officials and political candidates continue to debate the nation’s fiscal problems, The Concord Coalition this week emphasized the need for Washington to deal with long-term “structural” deficits in the federal budget even as short-term measures are used to support the economic recovery.

To understand the current situation and to choose appropriate solutions, it is important to distinguish between “cyclical” and “structural” components of federal borrowing.

“The cyclical deficit is caused by the financial crisis and severe recession from which the country is still recovering,” Concord said in an issue brief Monday. “The structural deficit reflects a chronic mismatch between government revenue and spending that under current policies will dramatically worsen as health care costs rise and the population ages.”

While cyclical deficits are expected in a weak economy and can help get it back on track, large structural deficits pose significant risks in many ways. They can divert savings from more productive investments, crimp important government programs that could support future economic growth, raise interest costs and place “ever-tighter constraints” on the ability of future generations to set their own fiscal priorities or to meet unforeseen challenges.

“Structural deficits will persist so long as policymakers continue to spend more than they tax,” Concord warns. “It is a matter of simple arithmetic. Closing the structural deficit means coming to grips with the forces that are driving spending and revenues farther apart and with the magnitude of the changes that must be made to rein in the resulting deficits.”
 
Read more with The Structural Deficit: What It Is, Why Do We Have One, and Why Should We Worry About It?