The U.S. Federal Intertemporal Budget Constraint: Restoring Equilibrium Through Increased Revenues or Decreased Spending?

Abstract_______________________________________________________________________ The literature concerning the U.S. federal deficit and its implications for the federal government's intertemporal budget constraint seems to have reached a tentative conclusion that starting with the Reagan administration the U.S. federal government has violated its intertemporal budget constraint. Recently the popular press has been debating the issue of whether this violation is due to a fall in tax revenues, that must eventually be made up in the future with (presumably) higher tax rates, or whether expenditures have risen to unsustainable levels and must eventually fall. I review the evidence on the stability of the U.S. federal intertemporal budget constraint and find that there was a break from the equilibrium that occurred about the fourth quarter of 1981. Analyzing the deviations of real revenues and real expenditures from their common stochastic trend reveals that expenditures account for a greater percentage of the deviation from equilibrium than do revenues. Further evidence demonstrates that while real revenues per unit of real GNP have grown at a relatively constant rate over the post-war period, real expenditures per real GNP have undergone an increase in trend growth starting in approximately 1976. ______________________________________________________________________________ JEL: H6, E6, C3