The Economic Benefits of Balancing the Federal Budget
Douglas Holtz-Eakin & Gordon Gray l March 2013
The U.S. is struggling with the dual challenges of bad growth and big debt. Since January 2009, the U.S. has
averaged merely 0.8 percent annual growth. Workers have struggled to find a job, with only 12,000 jobs
created each month on average and unemployment averaging 8.9 percent. At the same time, federal debt in
the hands of the public has more than doubled from 36 percent in 2007 to an estimated 76 percent by the end
of 2013, while gross federal debt exceeds Gross Domestic Product. Moreover, even after the tax increases
the American Taxpayer Relief Act (ATRA), the federal government’s finances are projected to continue to
deteriorate unless policies are adopted to change course.
The threat posed by the projections contained in the Congressional Budget Office’s latest Budget and
Economic Outlook has been analyzed previously.1 Yesterday, however, the House Budget Committee
proposed a budget resolution that would lead to a balanced budget by 2023.
There are many perspectives from which to analyze a budget resolution: the economic assumptions on which
it is based, the entitlement and tax reforms it enables, the defense and non-defense appropriations it permits,
and the debt levels it implies. In this case, however, it is the latter that is most important.
To start, the commitment to balance the budget drives the gross federal debt as a share of the economy south
from 107 percent of GDP in 2014 to 79 percent of GDP in 2023. Achieving these savings and reducing the debt
to levels below those projected under current law will avert the economic harm observed to occur with high
levels of indebtedness. Compared to current law projections, the budget resolution will reduce gross debt
sufficiently to be below the 90 percent threshold that is associated with slower growth by 2019.
Table 1: Gross Debt
Gross Debt
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Current Law (% GDP)
107
105
102
100
99
99
100
100
100
101
House Budget (% GDP)
107
103
98
93
91
88
86
84
81
79
This will have a series of economic benefits compared with a pathway that allows such high levels of
indebtedness to persist. Under current law, the debt will remain above the 100 percent of GDP – well above
key threshold for the entire 2014-2023 period. That is the period to which the budget resolution should be
compared as starting point – a period that includes reduced growth, reduced unemployment, and reduced
income. Specifically, researchers Carmen Reinhart and Kenneth Rogoff, followed by others, have undertaken
detailed historical analyses of 44 countries over the past two centuries. That research indicates that when
gross debt as a percent of GDP exceeds 90 percent, median growth is roughly 1 percent lower than countries
with lower debt burdens.2
1
2
http://americanactionforum.org/topic/analysis-congressional-budget-office-budget-and-economic-outlook-2013-2023
http://www.economics.harvard.edu/faculty/rogoff/files/Growth_in_Time_Debt.pdf
As noted earlier, under current law gross debt will remain above 90 percent over 2014-2023, which suggests a
persistent growth penalty of 1 percentage point per year. However, under the budget resolution that balances
the budget this penalty will be averted in 2019, raising economic growth by a percentage point during each
subsequent year in the budget window. Moreover, because the budget will remain in balance past 2023 the
growth benefits will persist.
Figure 1: Lower debt will add one percentage point of growth beginning in 2019
Using the administration’s estimates, one percentage point in growth translates into approximately 1 million
jobs created.3 The budget resolution would avert such job losses and increase job gains by 5 million over the
2019-2023 period.
3
http://www.politico.com/pdf/PPM116_obamadoc.pdf
Figure 2: One million jobs are gained each year after 2019 due to reduced debt, totaling five million jobs by 2023
As the budget balances and the debt is reduced, the more rapid GDP growth would lead incomes to rise more
rapidly. Median household income was $50,054 in 2011.4 Under projections consistent with economic effects
of high indebtedness, income growth would slow over the 2014-2023 period, and median household income
would grow to about $77,000 in 2023. However, the budget resolution reduces debt to below 90 percent and
by implication would be accompanied by incomes increasing to over $80,600 in 2023 – an income premium of
over $3,700.
The House Budget Committee resolution will be analyzed from many dimensions. Among the most important
is that its commitment to balance the budget would carry significant benefits on GDP growth, job creation,
and income growth.
4
http://www.census.gov/prod/2012pubs/p60-243.pdf
Figure 3: Income of the average worker will increase $3,778 by 2023