Journal Article

CBO and OMB projections, adjusted for inflation, show federal budget deficit under control

Abstract: Federal budget deficits continue to dominate discussions of the short-term economic future of the United States. This article by William G. Dewald stands in stark contrast to the aura of pessimism that pervades most such discussions. Dewalds optimism derives from the inflation adjustment factors he applies to the CBO and OMB deficit projections based on the 1986 Congressional Budget Resolution. He insists that pessimism about deficits stems from a tendency to focus on nominal rather than real (i.e., inflation-adjusted) deficits. Inflation mitigates the burden of a given nominal deficit in two ways: first, it lowers the real interest rate that the government pays, and second, it reduces the real value of publicly held government debt. Dewald claims that if the Budget Resolution is implemented, then by 1990, the ratio of inflation-adjusted publicly held debt to GNP will begin to decline, and the real deficit will be eliminated.

Keywords: Inflation (Finance); Budget deficits;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Economic Review

Publication Date: 1985

Volume: 71

Issue: Nov

Pages: 15-22