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Will budget deal cause economy to overheat?

Don Lee, Tribune Washington Bureau on

Published in Political News

The CBO has not yet updated its long-term budget forecast to reflect the tax cuts and new fiscal budget. But even before those changes, the U.S. national debt, as a share of the economy, had reached the highest level since World War II and was projected to keep climbing largely because of an aging population and growing expenses for health and retirement programs.

The U.S. debt held by the public, including foreign investors, is currently about $15 trillion.

"We've already entered a period where we have these structural deficits, and to answer that with a new round of tax cuts that are unpaid for, and a new round of spending that's unpaid for, is just adding insult to injury," said Michael A. Peterson, president and chief executive of the Peter G. Peterson Foundation, a nonpartisan organization focused on the country's fiscal challenges.

"What you're seeing is complacency and a lack of leadership and lack of courage to address these important problems," he said.

While members of both parties seemed to largely shrug at the huge spending increase, some Republican lawmakers balked at the budget deal, calling it fiscally irresponsible. House Speaker Paul D. Ryan, R-Wis., noted the ramped-up spending for the military that his GOP members sought.

About $165 billion of the additional spending would go to the Pentagon in the two-year deal, and about $130 billion to non-defense programs.

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The 2011 spending caps were meant to impose fiscal restraint on Washington. The Great Recession severely shrank government revenues, and spending surged in 2009 as President Barack Obama and Congress responded with a huge stimulus package to strengthen the economy.

The American Recovery and Reinvestment Act was a combination of tax cuts and government spending that totaled roughly $800 billion, most of which took effect in 2009 and 2010.

The federal deficit surged to $1.5 trillion in 2009 and remained above $1 trillion for the next three years, but then went back down to an average of about $575 billion a year in Obama's second term through 2016, representing a little more than the 3 percent share of gross domestic product that economists consider a maximum sustainable rate.

The Republican tax cuts and new budget package amount to a massive fiscal stimulus comparable to the Recovery Act, but what's different is that it is coming at a time when the economy is not faltering but chugging along.

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