"Policymakers are interested in the concept of 'fiscal space,' or the amount of room available for additional government borrowing, as they discuss plans for the federal budget. Though budget deficits have declined in recent years, debt held by the public was estimated to equal 76.6% of gross domestic product (GDP) at the end of FY2016, which would represent the highest ratio since FY1950. This Insight examines contributing factors to fiscal space availability and discusses recent developments. Assuming a continuation of low interest rates, it is unlikely that fiscal space will constrain short-term federal operations, but projections indicate that fiscal space may be a binding constraint in the medium- and long-term outlook. […] Whether one favors larger or smaller deficits, the market constraint on borrowing has implications for the optimal size and timing of future deficits. Further deficit reduction in the current economic expansion would give policymakers more fiscal space to use fiscal policy (increases in the deficit through higher spending or lower taxes) to counteract the next downturn or for new policy initiatives. Alternatively, creating more fiscal space now would reduce the risk of inadvertently running out of fiscal space in the future. The benefits of creating more fiscal space dovetail with the macroeconomic benefits of deficit reduction if the economy is near full employment, as the length of the expansion and the current unemployment rate would seem to indicate. Deficit reduction near full employment can help prevent the economy from overheating and avoid 'crowding out' of private investment, which would have positive implications for intergenerational equity and long-term growth."
CRS Insight, IN10624
Federation of American Scientists: http://www.fas.org/sgp/crs/index.html