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I don't understand why there should be any relation between deficit (which is a percentage of government revenue) and gdp growth (which is a percentage of total

I don't understand why there should be any relation between deficit (which is a percentage of government revenue) and gdp growth (which is a percentage of total gdp of the whole country).

rory 3y ago
The 8% deficit listed above _is_ a percentage of total GDP of the whole country (although the Fed has it at only 5.3%). The numbers are directly comparable. https://fred.stlouisfed.org/series/FYFSGDA188S https://fred.stlouisfed.org/series/FYFSGDA188S
- zeroonetwothree 3y ago
  One is a rate of growth and the other is a rate of spending. It would be like comparing that you spend 8% of your income on food and that you got a 4% raise this year. The two numbers have nothing to do with each other other than using the same unit.
  - rory 3y ago
    No, that's a bad analogy. It's more like I borrowed 8% of my annual income this year, and then bought 4% more than last year. If I hadn't borrowed all that money, I wouldn't have been able to buy that much. It's both intuitively obvious and empirically demonstrable that government deficits stimulates economic growth in the immediate term, since most government expenditure happens in the domestic economy.
1980phipsi 3y ago
It is also unsustainable in the long-run for the primary budget deficit (I.e excluding taxes interest costs) to grow faster than GDP growth.
HideousKojima 3y ago
Because tax revenue is fairly consistent as a percentage of GDP as well, so if deficit as a percentage of GDP exceeds faster than GDP growth then our debts are growing faster than our ability to repay them.
- Sparkle-san 3y ago
  Tax renevues were down 9% for the 2022 fiscal year which is part of why we saw a larger increase in the deficit. Part of that decrease is due to tax delays related to disaster relief and will come in during the 2023 year so the numbers are skewed.
coliveira 3y ago
The deficit is on percentage of GDP! Part of this GDP is direct consequence of government deficit spending. If you remove the 8% deficit you remove a big chunk of this GDP growth (probably all). But the situation shows that the gov is spending way more than the resulting growth, so this means it is a completely inefficient investment. You should expect at least 1 to 1.
- pavlov 3y ago
  In 2019, the US economy grew by 2.3% and the federal deficit as percent of GDP was 4.6%. So isn't the situation today exactly the same as four years ago, before Covid, under a Republican administration? Yet somehow I never heard this argument that GDP growth is a function of the deficit back in 2019.
  - coliveira 3y ago
    I have always pointed out this, be it a republican or democrat government. They all use the same tricks to inflate GDP by borrowing. Now, I'm not against borrowing for the sake of economic growth, but you cannot keep borrowing 6% to get 3% growth, in the end this policy will not work.
IG_Semmelweiss 3y ago
If your assets, lets say your house of value grew by 5% , you would say yay me. However, to make things simpler assume you don't have cash, for example, because you are unemployed. So, if you are making the mortgage payments using the credit card and the total CC payments this year alone are 8% of the value of the house, you can see problem. Eventually, the debt becomes due, and no amount of house will repay the incurred debt. So the relationship is, you may buy any house (assets) that grows in any amount, but if your CC hole is growing faster, you are actually worse than you started out.
- 542458 3y ago
  Analogies comparing household finances to government finances are pretty apples to oranges. A household can’t easily get unsecured loans below prime, print money to cover debts, or do many other things that governments can.
  - IG_Semmelweiss 3y ago
    Government is just a large group of people Financing and even currency issuance depends on trust. I can get a 0% from family and friends if i needed for far more my net worth. With connections I could also get counterfeit and pass it around. It comes down to the fraud triangle: opportunity, incentive, rationalization. The government may have more leeway to commit fraud than an individual. But the comparison is still apt, the fraud is the same, whether its a house being paid with CC or GPD with govt bonds. Ignore that at your own peril
    - mindslight 3y ago
      The dynamics are similar in many ways, but not the same. Scale and occupying a significant part of a market create their own qualities. Government bonds are closer to shares in a company than personal debt, or even corporate debt for that matter. Many people want to own government debt as a stable store of value. Even moreso as the global military hegemon, where other countries want to own the government's debt as a stable store of value. Conversely, the US government has also spent the last 40+ years abusing the fallacy that loaning money is completely different than spending, which has grotesquely distorted the financial industry and the housing market. So the sooner we shove off these misguided notions, like that the government's balance sheet is anything like a private balance sheet (and even worse, that the Federal Reserve's balance sheet is somehow distinct from the government's!), the better. Modern Monetary Theory is more in line with the actually-conservative Austrian School than the hybrid catastrophe of the past four decades.
personomas 3y ago
Well, the idea of spending more, is working more, which the latter is reflected by GDP. If the government spends more, it should cause more work, which should lead to higher GDP. This is one simple way to look at it. If the government is spending more, but GDP isn't growing by the same, it might be a sign that the governments expenditures are wasted. Now, I'm not saying that's happened, but it could be. Government spending is historically the most likely to be wasteful, in comparison to individual/retail/business spending.
jerf 3y ago
The answer is that GDP simply includes the government spending in itself, by definition: https://en.wikipedia.org/wiki/Gross_domestic_product#Components_of_GDP_by_expenditure https://en.wikipedia.org/wiki/Gross_domestic_product#Compone... I have "opinions", but if you are interested in this topic, rather than me dumping it here, it can be worth reading up a bit on GDP, then googling around for GDP criticisms. I think there's a sense in which it measures something useful, but it isn't measuring what people think it is and what the media sort of pushes it as meaning; it is correlated to the health of an economy but it is by no means a measure of the health of the economy, and the fact government expenditures are simply straight-up added to the GDP has such an obvious way for the government to manipulate the numbers that I can't hardly even call it an exploit. Whether they are doing that, I'll leave that to the reader to decide. Another relatively obvious issue is that the GDP number waved around in the popular press is generally not adjusted for inflation. That's not just the US GDP in 2023, it's any GDP the press will talk about, anywhere and anytime, so I'm not trying to make any stealth political point here. It's something to be aware of in any context a "GDP" comes up, look to see if it's inflation-adjusted or not. Such measures exist and more serious economists definitely use them. The wikipedia page I linked to above has a wide variety of other interesting definitions and that's still a Wikipedia overview itself, of course, not the fullness of econometrics.
croes 3y ago
What do you think why there is a deficit? Government spending is the income of others. The more they spend, the more others earn, leads to higher GDP.

I don't understand why there should be any relation between deficit (which is a percentage of government revenue) and gdp growth (which is a percentage of total gdp of the whole country).

rory 3y ago

The 8% deficit listed above _is_ a percentage of total GDP of the whole country (although the Fed has it at only 5.3%). The numbers are directly comparable. https://fred.stlouisfed.org/series/FYFSGDA188S https://fred.stlouisfed.org/series/FYFSGDA188S

zeroonetwothree 3y ago
One is a rate of growth and the other is a rate of spending. It would be like comparing that you spend 8% of your income on food and that you got a 4% raise this year. The two numbers have nothing to do with each other other than using the same unit.
- rory 3y ago
  No, that's a bad analogy. It's more like I borrowed 8% of my annual income this year, and then bought 4% more than last year. If I hadn't borrowed all that money, I wouldn't have been able to buy that much. It's both intuitively obvious and empirically demonstrable that government deficits stimulates economic growth in the immediate term, since most government expenditure happens in the domestic economy.

1980phipsi 3y ago

It is also unsustainable in the long-run for the primary budget deficit (I.e excluding taxes interest costs) to grow faster than GDP growth.

HideousKojima 3y ago

Because tax revenue is fairly consistent as a percentage of GDP as well, so if deficit as a percentage of GDP exceeds faster than GDP growth then our debts are growing faster than our ability to repay them.

Sparkle-san 3y ago
Tax renevues were down 9% for the 2022 fiscal year which is part of why we saw a larger increase in the deficit. Part of that decrease is due to tax delays related to disaster relief and will come in during the 2023 year so the numbers are skewed.

coliveira 3y ago

The deficit is on percentage of GDP! Part of this GDP is direct consequence of government deficit spending. If you remove the 8% deficit you remove a big chunk of this GDP growth (probably all). But the situation shows that the gov is spending way more than the resulting growth, so this means it is a completely inefficient investment. You should expect at least 1 to 1.

pavlov 3y ago
In 2019, the US economy grew by 2.3% and the federal deficit as percent of GDP was 4.6%. So isn't the situation today exactly the same as four years ago, before Covid, under a Republican administration? Yet somehow I never heard this argument that GDP growth is a function of the deficit back in 2019.
- coliveira 3y ago
  I have always pointed out this, be it a republican or democrat government. They all use the same tricks to inflate GDP by borrowing. Now, I'm not against borrowing for the sake of economic growth, but you cannot keep borrowing 6% to get 3% growth, in the end this policy will not work.

IG_Semmelweiss 3y ago

If your assets, lets say your house of value grew by 5% , you would say yay me. However, to make things simpler assume you don't have cash, for example, because you are unemployed. So, if you are making the mortgage payments using the credit card and the total CC payments this year alone are 8% of the value of the house, you can see problem. Eventually, the debt becomes due, and no amount of house will repay the incurred debt. So the relationship is, you may buy any house (assets) that grows in any amount, but if your CC hole is growing faster, you are actually worse than you started out.

542458 3y ago
Analogies comparing household finances to government finances are pretty apples to oranges. A household can’t easily get unsecured loans below prime, print money to cover debts, or do many other things that governments can.
- IG_Semmelweiss 3y ago
  Government is just a large group of people Financing and even currency issuance depends on trust. I can get a 0% from family and friends if i needed for far more my net worth. With connections I could also get counterfeit and pass it around. It comes down to the fraud triangle: opportunity, incentive, rationalization. The government may have more leeway to commit fraud than an individual. But the comparison is still apt, the fraud is the same, whether its a house being paid with CC or GPD with govt bonds. Ignore that at your own peril
  - mindslight 3y ago
    The dynamics are similar in many ways, but not the same. Scale and occupying a significant part of a market create their own qualities. Government bonds are closer to shares in a company than personal debt, or even corporate debt for that matter. Many people want to own government debt as a stable store of value. Even moreso as the global military hegemon, where other countries want to own the government's debt as a stable store of value. Conversely, the US government has also spent the last 40+ years abusing the fallacy that loaning money is completely different than spending, which has grotesquely distorted the financial industry and the housing market. So the sooner we shove off these misguided notions, like that the government's balance sheet is anything like a private balance sheet (and even worse, that the Federal Reserve's balance sheet is somehow distinct from the government's!), the better. Modern Monetary Theory is more in line with the actually-conservative Austrian School than the hybrid catastrophe of the past four decades.

personomas 3y ago

Well, the idea of spending more, is working more, which the latter is reflected by GDP. If the government spends more, it should cause more work, which should lead to higher GDP. This is one simple way to look at it. If the government is spending more, but GDP isn't growing by the same, it might be a sign that the governments expenditures are wasted. Now, I'm not saying that's happened, but it could be. Government spending is historically the most likely to be wasteful, in comparison to individual/retail/business spending.

jerf 3y ago

The answer is that GDP simply includes the government spending in itself, by definition: https://en.wikipedia.org/wiki/Gross_domestic_product#Components_of_GDP_by_expenditure https://en.wikipedia.org/wiki/Gross_domestic_product#Compone... I have "opinions", but if you are interested in this topic, rather than me dumping it here, it can be worth reading up a bit on GDP, then googling around for GDP criticisms. I think there's a sense in which it measures something useful, but it isn't measuring what people think it is and what the media sort of pushes it as meaning; it is correlated to the health of an economy but it is by no means a measure of the health of the economy, and the fact government expenditures are simply straight-up added to the GDP has such an obvious way for the government to manipulate the numbers that I can't hardly even call it an exploit. Whether they are doing that, I'll leave that to the reader to decide. Another relatively obvious issue is that the GDP number waved around in the popular press is generally not adjusted for inflation. That's not just the US GDP in 2023, it's any GDP the press will talk about, anywhere and anytime, so I'm not trying to make any stealth political point here. It's something to be aware of in any context a "GDP" comes up, look to see if it's inflation-adjusted or not. Such measures exist and more serious economists definitely use them. The wikipedia page I linked to above has a wide variety of other interesting definitions and that's still a Wikipedia overview itself, of course, not the fullness of econometrics.

croes 3y ago

What do you think why there is a deficit? Government spending is the income of others. The more they spend, the more others earn, leads to higher GDP.