Getting to Primary Balance: What’s the Rush?

February 14th, 2012 at 8:31 am

Slammed for time this week, but briefly, the WaPo has an informative piece up re the President’s budget this AM with lots of useful graphics.  But once again, the hand wringing over the path of the deficit is terribly misguided.

The figure shows the path of both this year and last year’s budget projections.  As you can see, it takes a little longer for the deficit to stabilize at the end of the figure.

Source: Washington Post

This is in trillions, but the main point is that the President’s budget reaches “primary balance,” meaning receipts pay for current services, but not for interest.  This corresponds to a deficit of around 3% of GDP, and at that point, you achieve the holy grail of fiscal rectitude: a stable, as in not rising, debt to GDP ratio.  The President’s new budget gets there in 2017.  (For the record, in later years, the projection is for debt to GDP to start rising again, largely due to pressures from rising health care costs—there is no path to fiscal liberation that does not go through health care.)

But my larger point—besides the fact that this is purely a speculative exercise since neither this nor his last budget came anywhere close to being enacted—is that the slight delay in reaching primary balance is neither important or economically meaningful.  It will not change anything for the worse, in terms of markets, bond yields, incomes, or jobs.  To the contrary, the reason it takes a little longer to get there is because the President’s budget wisely includes much needed temporary jobs measures.

They say justice delayed is justice denied.  It’s not the same with primary balance in the budget.  If we try to get there too quickly, we’ll screw up what is finally starting to look a little bit like a self-sustaining recovery.


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2 comments in reply to "Getting to Primary Balance: What’s the Rush?"

  1. MC says:

    I’d like to hear your take on health care a bit more. My policy keeps going more and more to a high-deductible, high Max Out Of Pocket… As one who has a wife who needs a lot of healthcare, it seems very regressive. So much so that it might pay well for me to find a public employer rather than stay in the private sector. The private sector can not be put on a pedestal and take these regressive stances without backing from the public.

    If you were to take an economics POV, the company is trying to incentivise people to lead healthy lives but it completely ignores the fact that much of that is not preventable and thus it acts as an incentive to leave the company (lowering their overall healthcare expenses)…. This comes from someone who is in position to afford to pay, but I make much more than the average. The average employee salary would struggle mightily.

    When the companies we work for continue to enact these types regressive but
    “competitive with the marketplace” policies, what have we? I think we have companies pushing us to a national healthcare policy that needs to be a single payer… not an exchange. Which seems politically untenable yet which is probably what is needed for the good of all for the good of our health as well as our collective balance sheet.

  2. Michael says:

    There is no point in “fiscal rectitude.” It’s inappropriate to be thinking in terms of deficits now, and the GOP will just destroy our revenue, like in Greece, once they get into power.

    You can’t make 20 year plans when half of the government hates the US and wants it to die. Take care of this year. Make sure people are hired and the kids are educated. Try to get some stuff off the ground that will be in full flight by 2017. But don’t make Clinton’s mistake and let everything you’ve built be destroyed in a year by your successor.