Structural budget deficits in the federal government: A theoretical perspective

Abstract

Enormous peacetime budget deficits in the United States have been a major concern for economists, political scientists, policy makers, and the public alike. President Reagan failed to achieve his 1980 campaign promise to balance the federal budget, and he now sets goals for reducing the budget despite a continuing strong performance of the economy. Why does the federal government fail to balance its budget? Do structural budget deficits impose negative impacts on key macroeconomic variables such as interest rate, investment, and growth rate? In this paper we will examine causes of structural budget deficits, then identify and explain the major areas of theoretical debate regarding the impacts of structural budgets on deficit in some key macroeconomic variables.