May 25, 2010
According to a Syndney Morning Herald article, Lawrence Summers, the White House economic advisor said that the U.S. needs to continue to support the economic recovery by spurring job growth and boosting output first before addressing the issue of the growing budget deficit.
While the economy has shown signs of growth after the Great Recession, the country is still on shaky ground as unemployment is still high. Summers suggested that spending is still needed to support the fragile recovery and concerns of the rising deficit spending should be set aside for now.
“Appropriate short-run expansionary budget policy can make an important contribution to establishing the confidence necessary for sound growth. And assurances that deficits will come down once an economy recovers can reinforce this confidence.”
However, the budget deficit numbers are difficult to ignore given the turmoil in Europe.
The US government suffered its 19th consecutive month of budget deficit in April, the highest ever for that month, as the economy emerged from a brutal recession that struck in December 2007.
The latest monthly deficit brought the shortfall for the first seven months of the 2010 fiscal year ending September 30 to $US799.68 billion ($A962.19 billion).
The White House has forecast the 2010 deficit will swell to a new record of $US1.555 trillion ($A1.87 trillion), a ratio of more than 10 per cent of gross domestic product (GDP), due to massive spending to stimulate recovery from the worst recession in decades.
Despite the alarming numbers, Summers suggested that a solution is possible once the recovery is on solid footing.
Summers said that over the next two to three years, a recovering economy and belt-tightening measures, such as a freeze in non-security spending and the expiration of high-income tax cuts, should halve the deficit ratio.
The projected decrease will be “the fastest rate of deficit reduction since World War II,” he predicted.
Furthermore, the article added that
“The challenge we must thus confront is the imperative to both do everything in our power to accelerate the momentum behind recovery so that it is addressing what remains a national imperative on job creation; we must also address the challenge to growth and prosperity of budget deficits in the medium to long term that also cannot be ignored,” Summers said.
He said he was convinced that it was “impossible to sensibly address either unemployment or long-run fiscal challenges in isolation.”
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