IS THE BUDGET DEFICIT “TOO LARGE?”

Yes. Specifically, we find that recent spending and taxing policies of the government–if continued–violate the government's intertemporal budget constraint. As a result, government spending must be reduced and/or tax revenues must be increased. These conclusions are based on tests of whether government spending and revenue are cointegrated. In addition to examining real spending and revenue, we also normalize these variables by real GNP and population. For a growing economy, these normalized measures are perhaps more pertinent. We also test and find support for the hypothesis that deficits have become a problem only in recent years.