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Fiscal Review


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Review of fiscal policy from 1987 to 2007

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Fiscal Review

  1. 1. Fiscal Policy 1977 - 2007 Guy Lion April 2008
  2. 2. Topics covered <ul><li>Observations of fiscal condition indicators covering the 1977 – 2007 period; </li></ul><ul><li>Benchmarking fiscal policy over same period. </li></ul>
  3. 3. <ul><li>Fiscal Condition 1977 - 2007 </li></ul>
  4. 4. Fed. Revenue Growth since 01 The combination of tax cuts and economic malaise ( bust, 9/11, etc..) resulted in Fed revenue contractions from 2001 to 2003. Source: CBO Table F-1 But, since 2004 Fed revenue growth has been for the most part in line with the average yearly growth since 1977 (7.36%).
  5. 5. Budget Deficits since 81 Source: CBO Table F-2 Update . The Deficit jumped to $455 billion in fiscal 2008. But, that represents a sustainable 3% of GDP which would meet the EU Zone stringent fiscal requirement that few of its members ever meet. The Media goes crazy about record size deficits. But, it forgets it about similarly record size GDP of above $14 trillion. The Deficit has a lot more meaning when scaled relative to the size of the economy. The Media readily understates this aspect.
  6. 6. Budget Deficits since 01 The Budget Deficit reduction from -5.0% of GDP in 2004 to half that level (-2.5%) in 2007 has to be the most significant under-reported fiscal event by the Media. Source: CBO Table F-2 Update . As indicated on previous slide, Deficit increased back up to around 3% of GDP.
  7. 7. Budget Deficit by Administration Source: CBO Table F-2 Update . Bush Jr. most recent Deficit was – 3.2% in his 8 th year which would not materially affect his average Deficit level during his term.
  8. 8. Public Debt/GDP since 77 Source: CBO Table F-2 Public Debt = Federal Debt – Federal Debt held by the Fed Government.
  9. 9. Public Debt/GDP since 01 Source: CBO Table F-2 Another piece of interesting unreported news: The current Administration has kept the Public Debt level as % of GDP significantly below its average since 77. And, it has steadily decreased this debt ratio for the past three fiscal years. Update . The Public Debt/GDP % will have risen in 2008 and will continue to do so in 2009. But, it is unlikely to rise much above 40% of GDP that still represents a sustainable debt level. To prevent a depression, a moderate increase in debt level is the appropriate policy anyway.
  10. 10. Public Debt/GDP by Administration Source: CBO Table F-2
  11. 11. Debt ratio – international comparison Source: Wikipedia. CIA – The World Factbook. 2007 estimates. Compared to other developed countries, the U.S. has a relatively low Public debt/GDP ratio (36.8%).
  12. 12. Debt ratio – international comparison map Source: Wikipedia. CIA – The World Factbook. 2007 estimates. Public Debt/GDP in % Surprisingly, Russia and satellite States, China, Australia, and a few African countries have among the lowest Debt ratios. Among Western economies, the U.S. has a relatively lower ratio at 36.8%.
  13. 13. Is current tax level too low? Source: CBO Table F-4 Tax receipts as % of GDP dropped rapidly during the first term of current Administration because of economic slowdown and tax cuts. But, this ratio bounced right back up during the second term. That’s another non-reported fiscal story in the Media.
  14. 14. Tax level by Administration Source: CBO Table F-4
  15. 15. Are large corporations paying their fair share? Source: CBO Table F-4 Same trend observed before where the first term sees low tax receipts (tax cuts, slow economic growth, low corporate earnings). But, the second term sees the trend reversing. Corporate tax receipts as % of GDP for the past two fiscal years are at their highest levels since 1978 under Jimmy Carter.
  16. 16. Corp. inc. tax receipt/GDP by Administration Source: CBO Table F-4
  17. 17. Are the rich bypassing estate taxes more than ever? Source: CBO Table F-4 … Not really. As the data shows, estate taxes have never raised a material proportion of tax receipts. The phased in reduction in Estate tax rates brought related receipts in line with historical average (avg. since 77: 0.22%).
  18. 18. Is Interest payment on the Debt at crippling levels? No… Source: CBO Table F-6 Net Interest paid by the Gov. = Interest Expense – Interest earned
  19. 19. How about since 2001? Debt service (interest payment) has remained at a very low level during the current Administration relative to the average since 1977 at 2.47% of GDP.
  20. 20. Net interest/GDP by Administration
  21. 21. <ul><li>Benchmarking Fiscal Policy </li></ul>
  22. 22. Sustainable Budget Deficit Model In this example, using GDP growth and inflation rates that are representative of the averages over the past 30 years, and picking a reasonable debt ratio of 50% (by international standards) you get a sustainable Budget Deficit of about -3.0%. This means you could run Deficits of -3% of GDP forever and your Debt ratio would remain unchanged at 50%. Accidentally, this -3% corresponds to the fiscal target for countries belonging to the Euro Zone.
  23. 23. Keynesian - Lite <ul><li>Keynes suggested running Deficits during recessions, and running Surpluses the remainder of the time to smooth out the business cycle; </li></ul><ul><li>Based on the sustainable Deficit and Debt ratio concept, we may suggest to run Deficits larger than the sustainable Deficit level (-3.0%) during recessions, and run Deficits either smaller or equal to the sustainable Deficit level otherwise. </li></ul>
  24. 24. Fiscal Policy benchmarking The matching between Deficits and GDP growth is deemed good if the Deficit cell is not colored. If it is red, it means the Deficit was too large relative to GDP growth. If the cell is blue, the Deficit was potentially too small. Reminder sustainable Deficit level is about – 3% as defined on previous slide.