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April 03, 2009

What's a normal deficit?

The federal budget deficit numbers being projected are huge, over $1.7 trillion this year alone. It's difficult to grasp the relative size of this number. How can we gauge the size of budget deficits, and is there anything we can call a normal deficit?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, you're right, when these numbers get up in the billions and trillions, it's hard for even economists to keep track of them and really put them in a kind of relevant view. So what we tend to do - we economists - is we look at them on a percentage basis. For example, we say, alright, a budget deficit of $1.7 trillion, what percentage is that of national income, also called gross national product? It's kind of like saying, how much - if you're doing some borrowing - how does the amount you're borrowing relate to your income? So if we look at the $1.7 trillion, it will be 12 percent of our national income and will actually be the highest since World War II. Now, on to the question about a normal budget deficit. Of course, normal is always going to be a subjective term. The administration wants to get the budget deficit back eventually to a mere 3 percent of gross domestic product. And actually many economists would agree that that level is probably manageable. You might translate manageable as meaning normal. One final point: remember the difference between deficit and debt. The deficit is what we add to the national debt each year. The national debt is the total that we owe."

Posted by Dave at April 3, 2009 08:00 AM