Budget Policy and Fiscal Risk: Implications for Defense
ARMY WAR COLL STRATEGIC STUDIES INST CARLISLE BARRACKS PA
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Over the past decade, the federal governments fiscal outlook has been transformed. During the early 1990s, budget deficits were widely viewed as not just a chronic problem but a growing one. From 1990 to 1994, annual deficits averaged almost 250 billion, or nearly 4 percent of gross domestic product GDP, but by FY 2000, the budget was in surplus by more than 235 billion, and total surpluses of more than 5.6 trillion for FY 2002-2011 have recently been projected. Many other advanced democracies have improved their fiscal balances in recent years, but the shift toward budget balance and public debt reduction has been especially pronounced in the United States. Multiyear deficit-reduction agreements enacted in 1990, 1993, and 1997 have reduced discretionary spending to historic lows and raised revenue levels to peacetime highs. As a result of these policy changes and unusually favorable economic conditions, the United States has ushered in a new era of surplus budgeting. The budget policy debates of George W. Bushs administration will therefore take place in a fiscal environment very different from that of his predecessors. Rather than struggling to balance current budgets, the administration and Congress must decide how to minimize long-term fiscal risks-in effect, how to allocate surpluses among debt reduction, tax cuts, and spending increases without exacerbating the formidable entitlement financing problems that loom on the horizon. These problems represent the critical backdrop for todays budgetary deliberations.
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