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

 

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]

 

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.

 

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.

 

Figure 3: Income of the average worker will increase $3,778 by 2023