2slugbaits Looks at the On-Budget Primary Surplus or Deficit

This post is by 2slugbaits…


Some might find this interesting. While the press frequently talks about the deficit, they rarely distinguish between the total deficit and the primary deficit. The primary deficit is the total deficit less debt servicing costs; i.e., interest payments. The government’s long run budget constraint is really determined by the primary deficit and not the total deficit.

The chart below shows the primary surplus/deficit for “on-budget” accounts as a percent of GDP. In OMB accounting lingo, interest against the on-budget accounts is usually greater than net interest because the off-budget accounts (primarily FICA) are running a surplus and therefore accrue positive interest receipts. So the FICA surpluses not only mask the on-budget deficit, but they also mask the interest payments required to service the on-budget deficit.

The chart clearly shows that up until the mid-1970s grown-ups were in charge. The government ran small primary surpluses during the good times and small primary deficits during the lean times, all the while paying down the massive debt from WW2. But following the 1974-1975 recession we see the grown-ups went on vacation and no one was around to take away the punch bowl. Party on Garth! Thus began the era of permanent structural on-budget deficits.

But during the Clinton years we see where fiscal sanity returned again and, to a large extent, reversed much of the damage done over the preceding 20 years. Who’d a thunk it. The President with the undisciplined personal life restores fiscal sanity to Washington. By the end of the Clinton years economists and the Fed were actually beginning to worry that in a few years there might not be enough public Treasuries to facilitate open market operations. Alan Greenspan actually wrung his hands over the prospect of massive Treasury surpluses moving into private equity markets.

Then along came Bush 43. While it is true that there were small on-budget primary surpluses in 2006 and 2007, those surpluses were disappointingly small given where we were in the business cycle. We’re now in the sixth year of the economic expansion, so we would have expected much larger on-budget primary surpluses. The Bush years were a blown opportunity to set the country’s fiscal house in order. For a supposedly religious President you’d think that Bush might have paid more attention to the story of Joseph and the granaries.

Data comes from the White House’s OMB Tables.

The on-budget total surplus/deficit number. The difference between the two tables is the on-budget primary surplus/deficit. This value was then divided by GDP (OMB table 10.1)


This post was by 2slugbaits.