Economic Effects of Sustained Budget Deficits

40 Pages Posted: 4 Feb 2011

See all articles by William G. Gale

William G. Gale

Brookings Institution

Peter R. Orszag

Lazard Asset Management

Date Written: July 2003


The effects of fiscal policy on the economy have received substantial attention in academic and policy circles. We review this literature in light of recent policy debates and new research and obtain three results. First, other things equal, deficits reduce national saving and future national income, even if international capital inflows avert an increase in interest rates. Second, the recent fiscal deterioration implies significant declines in future national income. Third, studies incorporating the best available information about expected future deficits tend to find significant effects of expected deficits on current long-term bond yields, controlling for other factors.

Keywords: budget deficit

JEL Classification: H6, H62

Suggested Citation

Gale, William G. and Orszag, Peter R., Economic Effects of Sustained Budget Deficits (July 2003). National Tax Journal, Vol. 56, No. 3, 2003, Available at SSRN:

William G. Gale (Contact Author)

Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-797-6148 (Phone)
202-797-6181 (Fax)

Peter R. Orszag

Lazard Asset Management ( email )

30 Rockefeller Plaza
New York, NY 10112
United States

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