United States Applied Strong Deficit Reduction Policies to Achieve Fiscal Balance

• Author: Michael Leidy
• Position: IMF Western Hemisphere Department
• Pages: 283-284

Page 283

Since 1991/92 (the U.S. fiscal year extends from October 1 to September 30), the U.S. unified federal fiscal deficit has dropped rapidly, falling to 0.3 percent of GDP in 1996/97 from 4.7 percent (see chart, this page). Some of the improvement in the fiscal situation is attributable to the strength of the economic recovery since the 1990-91 recession, but policies enacted with the Omnibus Budget Reconciliation Act of 1993 and subsequent legislation have also been major contributing factors. Most estimates indicate that significantly less than half of the improvement in the fiscal deficit that has taken place since 1992 is attributable to the cyclical recovery of the economy. The remaining improvement is attributable to tax increases that raised the structural revenue-to-GDP ratio by an estimated 2 percentage points and to cuts in defense and nondefense discretionary spending of \Vi percentage points and almost lA of a percentage point of GDP, respectively.

Business Cycle

Estimates of the contribution made by the business cycle to the improvement in the federal fiscal deficit can vary considerably, since they depend on the estimated size of the output gap (actual minus potential GDP) and the estimated elasticities of tax revenues and outlays with respect to GDP. In its 1998/99 budget document, for example, the U.S. administration estimates that 35 percent of the reduction in the budget deficit between 1991/92 and 1996/97 resulted from the cyclical improvement in the economy. The U.S. Congressional Budget Office estimates that just under 40 percent of the reduction in the actual budget deficit resulted from the cycle. In order to eliminate one source of uncertainty affecting estimates of the structural balance, identical elasticities (1.1 and -0.2 for revenue and expenditure elasticities, respectively) were applied to alternative estimates of the U.S. output gap prepared by the IMF, the Congressional Budget Office, and OECD economists (see chart, page 284). These estimates show that the lion's share of the reduction in the deficit over the period 1991/92-1996/97 occurred for reasons other than the cycle. Based on these estimates, the improvement in the structural balance accounted for between 3.4 and 3.7 percentage points of the total improvement of 4.4 percentage points of GDP.

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Revenues

Unlike outlays, total revenues in the United States tend to rise...