US debt is only exceeded by Greece and Egypt

America's enormous budget deficit is now exceeded as a share of national income only by Greece and Egypt among all of the world's major countries. To be sure, the current deficit of 9.1 per cent of GDP is due in part to the automatic effects of the recession. But, according to the official projections of the United States Congressional Budget Office (CBO), even after the economy returns to full employment, the deficit will be so large America's national debt-to-GDP ratio will rise for the rest of this decade and beyond.

Understanding how to achieve US fiscal consolidation requires understanding why the budget deficit is projected to remain so high. Before looking at the projected future deficits, consider what happened in the first two years of President Barack Obama's administration that caused the deficit to rise from 3.2 per cent of GDP in 2008 to 8.9 per cent of GDP in 2010 (which in turn pushed up the national debt-to-GDP ratio from 40 per cent to 62 per cent).

The 5.7 per cent-of-GDP rise in the budget deficit reflected a 2.6 per cent-of-GDP fall in tax revenues (from 17.5 per cent to 14.9 per cent of GDP) and 3.1 per cent-of-GDP rise in outlays (from 20.7 per cent to 23.8 per cent of GDP). According to the CBO, less than half of the 5.7 per cent-of-GDP increase in the budget deficit was the result of the economic downturn, as the automatic stabilisers added 2.5 per cent of GDP to the rise in the deficit between 2008 and 2010.