[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

for 2004. As of 2005, it was clear that the government, instead of running a surplus
in 2004, saw the deficit soar above $400 billion.
One reason budget projections often turn out wrong is that in making its calculations
the CBO, by law, must assume there will be no changes in tax or expenditure
programs. Yet these programs do change, partly in response to the CBO’s figures.
In the 1990s, the large projected deficits led Congress to change taxes and curb
growth in expenditures; in 2000, with the CBO projecting future surpluses, Congress
cut taxes to reduce future revenues. Another reason for the projections’ inaccuracy
is that unforeseen events can alter the government’s fiscal position. For example,
the recession that started in 2001, further tax cuts, the terrorist attacks of
September 11, 2001, and the rise in spending for homeland security all contributed
to turning the projected surpluses into actual deficits.
RISK FACTORS FOR THE FEDERAL BUDGET
Three broad factors are likely to play important roles in determining the future
budget outlook for the federal government.
Defense Spending From 1983 to 1988, defense spending averaged 6 percent
of GDP. The end of the cold war was followed by reductions in defense spending. By
2002, this category had fallen to slightly over 3 percent of GDP. The war on terrorism
has led to a rise in defense spending, and it is uncertain how these expenditures
will trend in the future.
Higher Social Spending on the Elderly As the elderly population in the
United States has grown, not only in absolute number, but also as a proportion of the
population, federal expenditures on programs such as Social Security and Medicare
(providing health care to the aged) have increased dramatically. These programs
are projected to continue to grow, with significant implications for the federal budget.
A central question is how much of the government’s revenues needs to be set aside
to help pay for future Social Security and Medicare benefits.
Increasing Health Expenditures Through Medicare and Medicaid, its program
that provides health care to the poor, the government has assumed an increasing
share of total health care expenditures, which have soared in recent years. The
addition of a prescription drug benefit to Medicare and the rapid increase in drug
prices will significantly affect the government’s need for revenue in the future. New
but expensive medical technologies and the aging of the population are also
contributing to the swift escalation of medical costs.
562 ∂ CHAPTER 25 GOVERNMENT FINANCE AT FULL EMPLOYMENT