[I’ve been working on this for a couple of weeks. At the moment, it is a working paper (at best). Comments are welcome. If you make changes to the Excel workbook, please email it to me.]

**Rep. Matt Gaetz (D-FL) is the ringleader of the “gang of eight” responsible for ousting Rep. Kevin McCarthy (R-CA) as Speaker of the House**. One of Mr. Gaetz’s pet peeves is the federal budget deficit. He wants to reduce the deficit to zero in ten years. **Balancing the budget will lead to the Gaetz recession (or something very close to it)**. Read on for details.

Even if the deficit is reduced to zero in ten years, the debt will still rise by about 33%.

## The Arithmetic

**The government budget deficit is the difference between government spending and government revenue. When spending exceeds revenue for a year, the government runs a budget deficit. When spending is less than revenue, the government runs a budget surplus.** Surpluses are not quite as rare as unicorns, but the last one we saw was in 2001. Aided by the dot-com boom, the Clinton administration ran budget surpluses from 1998 to 2001.

**The government debt is the total amount the federal government has borrowed.** When the government runs a budget deficit, the U.S. Treasury issues debt to close the gap between revenue and spending. **Every year the government runs a deficit, the debt increases.**

Think of it this way. In December, 2023 you run up $2,000 in charges on a credit card. At the end of the month, you can only pay $1,500. You have a $500 balance outstanding. (If this ever happens to you, just say you had to issue some debt last month.) In January, still suffering from Christmas shopping frenzy, you spend another $2,000. Once again, at the end of the month you can only pay $1,500. Your new balance is $1,000. Most of us know this, hopefully not from real life experience.

The government budget works the same way. **Let’s assume we achieve the Gaetz balanced budget in ten years by reducing spending and/or increasing taxes by the same amount each year. (Using current data, the deficit would be reduced by $220 billion each year.)** Here’s what that looks like:

Note that **the debt increases by $10 trillion over those ten years to $43 trillion**. This is the first point. * Even if the deficit is reduced to zero in ten years, the debt will still rise by about 33%.* And

**interest on the debt rises to $2.15 trillion**. Not good. But I want to examine

**the implications for the entire economy.**

## Impact on the Economy

Here I want to look at **the macroeconomic impact of the deficit reduction**. I’ve made many assumptions (listed below). **If you don’t like mine**, click here to download the Excel workbook. Have fun!

#### Assumptions

**The deficit is reduced by the same amount each year**, reaching zero in 2033.**The average interest rate on the debt is 5%.****The cumulative reduction in the deficit is $2 trillion**(approximately equal to next year’s deficit).- The deficit reduction
**multiplier is 1.5**. (This is the generally accepted income-expenditure multiplier for government spending.) - One concern is how the deficit is reduced: tax increases or spending cuts. I’ve short-circuited that question by assuming the multiplier applies equally to both. That way,
**the income-expenditure multiplier becomes a deficit change multiplier.** - I’ve relied on
**forecasts for real GDP, nominal GDP, and the GDP deflator from the Congressional Budget Office’s 30-year forecast**.^{[1]} **I deflated my forecast of nominal GDP including the deficit reduction using the GDP deflator from the CBO 30 year forecast.**(CBO pretty much admits they can’t forecast inflation, with rates of 2.5% (2024), 2.1% (2025-26), and 2.0% (2027 forward).

#### Analysis

The** total reduction in the deficit is $2 trillion**. **Multiplying that by 1.5 (the multiplier) gives an expected reduction in GDP of $3 trillion in 2033**. I reduced post-deficit-reduction GDP by equal amounts from 2024 to 2032.

The results are startling. **Annual growth in nominal GDP falls from 4.1% to 3.2%**. Overall growth for the ten year period falls by 10.9%. **2033 GDP is 7.6% lower with the deficit reduction**. These results are on the “Model deficit -$2 tril” sheet of the Excel workbook.

The real economy is on the sheet “Model deficit -$2 tril real.” **Annual real GDP growth falls from 2.1% to 1.2%.** Overall growth for the ten year period falls by 9.1%. Real GDP in 2033 is 7.5% lower.

#### Per Capita Analysis

Real GDP will grow 1.1% per year. But we’re really interested in **GDP per capita**.^{[2]} Using Census Bureau projections,** growth in real GDP per capita falls from 1.4% to 0.6%**. **In 2033 real GDP per capita is $5,115 lower after the deficit reduction.**

## Is This a Recession?

Only the NBER Business Cycles committee knows for sure. But, at best, 1.2% real growth is pretty anemic. **And real GDP per capita growing at 0.8% per year is … not good.**

- The 30-year forecast is from “The 2023 Long-Term Budget Outlook” (June 28, 2023) available at https://www.cbo.gov/publication/59014. The direct data download link (Excel format) is https://www.cbo.gov/system/files/2023-06/57054-2023-06-LTBO-econ.xlsx. Accessed October 8, 2023. Ten year forecasts are from “Interim Economic Projections for 2020 and 2021” (May 19, 2020) available at https://www.cbo.gov/publication/56351. Accessed October 5, 2023. A third source is “How the Fiscal Responsibility Act of 2023 Affects CBO’s Projections of Federal Debt” (June 9, 2023) available at https://www.cbo.gov/publication/59235. Direct data download link (Excel format) is https://www.cbo.gov/system/files/2023-06/59235-Data.xlsx. Accessed October 6, 2023. ↑
- Data is from the U.S. Census Bureau “2017 National Population Projections Datasets” Main Data Table. CSV file available at https://www2.census.gov/programs-surveys/popproj/datasets/2017/2017-popproj/np2017_d1_mid.csv. Accessed October 10, 2023. ↑