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Slower Growth Means Bigger Deficits

by Jacob Goldstein
Aug 3, 2011

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Of all the ways to bring down government deficits and make the national debt more manageable, economic growth is by far the most pleasant.

When GDP grows, companies and individuals make more money and pay more taxes. So more economic growth means lower deficits. Economic growth also means the existing national debt gets smaller relative to the overall economy.

But there's a flip side to this: Slow economic growth — or, in very bad times, an economy that's actually shrinking — makes deficits bigger and debt more difficult to deal with.

So the recent report that the U.S. economy is growing much more slowly than expected is bad news for the country's long-term debt outlook.

The CBO — the non-partisan scorekeeper that Washington looks to for deficit projections — estimated that the U.S. economy will grow at a rate of 3.1 percent this year.

But the economy actually grew at an annual rate of less than 1 percent in the first half of this year, according to the GDP numbers released just a few days ago. Even if growth picks up in the second half, it's very likely that economic growth for the full year will be significantly lower than CBO projected.

That, in turn, means the deficit will be higher than projected, and the debt will be bigger relative to the overall economy.

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