More on the Downside Risk of Changes to Budget Forecasts

Yesterday, we argued that to actually stabilize the debt as a share of the economy, you probably need to propose a plan with even more savings than what would stabilize the debt under current projections. The risks come from both the economic and political uncertainties:

...many other private forecasters, including the IMF, have also revised the economic outlook downward, which can have serious effects on the budget outlook. Even slightly lower growth could put debt as a share of the economy from a stabilized to an upward path as automatic spending rises, revenues shrink, and output grows more slowly. In addition to economic uncertainty, there is always the political uncertainties that policymakers could do less than what's needed to at least stabilize the debt and could go back on previously enacted debt reduction due to political pressures.

A report from Moody's Investors Services, one of the largest credit rating agencies in the U.S., warned that recently slowing economic growth and the threat of lower growth in the near future is making the task of deficit reduction more difficult. With a more fragile and smaller economy, stabilizing and reducing the debt-to-GDP ratio becomes even harder as automatic stabilizers could potentially keep deficits and debt inflated while the denominator in the equation, or GDP, becomes smaller.

The unpredictability of future projections makes the case for "Go Big" all the more pressing. We need to set debt on a downward path that leaves less up to chance.

 

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