Budget Outlook: Projections and Implications,

¶ … Budget Outlook: Projections and Implications, William G. Gale and Peter R. Orszag (2004) specifically address the fiscal policy of the federal budget of the United States. Overall, Gale and Orszag note that the outlook for the United States' federal budget is increasingly gloomy.

The authors investigate both budget deficits in the short-term of the next decade, and then go on to discuss the budget outlook over the next 75 years. In the next decade, Gale and Orszag argue that budget deficits will have a profound impact on both annual national income and long-term interest rates. Specifically, unified budget deficits will raise long-term interest rates by 80 to 120 basis points in the next decade, and reduce annual national income by about $1,500 to $3,000 per year for each American household.

Over the next 75 years, the bad news continues. Permanent tax cuts, note the authors, would lead to a budget deficit of about seven percent of GDP. Increased Social Security costs, increases in Medicare and Medicaid spending, and loss of revenue from tax cuts are expected to contribute to this long-term outlook.

The tax cuts and increased Medicare and Medicaid spending noted in the article are consistent with an expansionary or loose fiscal policy. This type of policy is aimed at "stimulating total spending in the economy," through cutting taxes to leave businesses and individuals with more money to buy goods, thus raising demand and increasing production and generating increased spending (Microsoft® Encarta® Online Encyclopedia).