Just Saying

Not to risk politics, but this is a useful demonstration of why budget policy matters all the time, even when times are good. Coming out of the 2001 recession, the CBO projected sustained and increasing budget surpluses. Granted, one should never put too much faith in the CBO baseline scenario coming true; it is based on current law continuing unchanged, even if it is highly unlikely.

This graph demonstrates what could have been. Any number of policy changes, especially less tax breaks and wars, could have given the government far more room and flexibly to act in a counter-cyclical manner.


There will always be another recession, and they are incredibly hard to predict. Any government that is not fiscally prudent because things are so good they can afford it is doing its citizens a disservice. An example is California, or Italy. An example of the opposite tendency is Germany; a better one is Chile.


Before the most recent recession Chile was going through an economic boom. The government was facing increasing revenues with spending remaining relatively flat. Chile's finance minister steadfastly advocated saving the surpluses, a tough argument to make in a developing country where so many people can be helped by additional spending. He was often burned in effigy during protests. 

In 2002 Chile's government debt peaked at 15.5% of GDP. Throughout the following expansion, Chile's debt decreased to a low of 4.4% in 2007. However, even with Chile's fiscal prudence, the benefits of growth reached the poor. In 1990 14% of Chileans lived under $2 a day, by 2006 it was 2.4%.


When the most recent recession hit, tax revenues decreased. While private demand was weak, the government had plenty of room to increase spending and stimulate the economy. Debt has since increased to 9.8% of GDP. But, Chile's economy has returned to growth, government spending is decreasing and the cycle begins again.