The Gaetz Recession

[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:

Deficit, Debt, and Interest Gaetz Recession

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Nominal GDP before and after deficit reduction The Gaetz Recession

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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!


  1. The deficit is reduced by the same amount each year, reaching zero in 2033.
  2. The average interest rate on the debt is 5%.
  3. The cumulative reduction in the deficit is $2 trillion (approximately equal to next year’s deficit).
  4. The deficit reduction multiplier is 1.5. (This is the generally accepted income-expenditure multiplier for government spending.)
  5. 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.
  6. I’ve relied on forecasts for real GDP, nominal GDP, and the GDP deflator from the Congressional Budget Office’s 30-year forecast.[1]
  7. 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).


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.

  1. The 30-year forecast is from “The 2023 Long-Term Budget Outlook” (June 28, 2023) available at The direct data download link (Excel format) is Accessed October 8, 2023. Ten year forecasts are from “Interim Economic Projections for 2020 and 2021” (May 19, 2020) available at 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 Direct data download link (Excel format) is Accessed October 6, 2023.
  2. Data is from the U.S. Census Bureau “2017 National Population Projections Datasets” Main Data Table. CSV file available at Accessed October 10, 2023.


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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.