The fiscal hole that must be filled – Financial crisis

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Clive Crook  FT.com Published: April 5 2009 19:09

While Barack Obama was in Europe last week, Congress was voting on his budget. Because of the administration’s surpassing ambitions, and because of the colossal demands its budget will place on domestic and international capital markets, the outcome of this debate will matter more in the end for the US economy, and even for the world economy, than all of London’s pleasant if ineffectual global summitry.

Both houses of Congress passed versions of the budget that are close to what Mr Obama proposed. Yet what comes next is still unclear. This will be decided in the House-Senate conference to reconcile the two versions, and in the tax and spending measures that follow. At this stage only one thing is sure: the permanent excess of spending over revenue in the long-term fiscal outlook.

The administration’s original proposal, you recall, left a persistent budget deficit of roughly 3 per cent of gross domestic product. This has nothing to do with stimulus: the gap is there 10 years out and beyond, long after the economy is assumed to have experienced a prompt, strong, and sustained recovery. Taking account of newer data, and using slightly less optimistic near-term assumptions, the Congressional Budget Office has already upped that projected deficit to 4 per cent of GDP.

FT.com / Columnists / Clive Crook - The fiscal hole that must be filled

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