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Budget Gap Hinges on Economy, Not Fiscal Cliff: Chart

Sustaining U.S. economic growth may narrow the federal government’s budget deficit more than raising taxes or reducing outlays, according to James W. Paulsen, Wells Capital Management Inc.’s chief investment strategist.

The CHART OF THE DAY tracks deficits and surpluses as a percentage of nominal gross domestic product, unadjusted for inflation, since 1969. Paulsen included a similar chart in a report two days ago.

Deficits totaled 6.9 percent of nominal GDP for the 12 months ended in September, according to data compiled by the Treasury. The gap narrowed from 10.4 percent in December 2009, six months after the latest recession ended, even as President Barack Obama and a Republican-led House of Representatives sparred over fiscal policy.

“We’ve had gridlock throughout this recovery and yet the deficit’s been improving all on its own,” Paulsen said during a Bloomberg Radio interview yesterday. At the current pace, the budget gap is poised to fall below 5 percent of nominal GDP in two years, according to the Minneapolis-based strategist.

Any “grand bargain” by the White House and Congress on the so-called fiscal cliff of tax increases and spending cuts runs the risk of cutting off economic growth, which is mainly responsible for the shrinking deficit, he said.

Nominal GDP has expanded at a 3.8 percent to 4.5 percent pace since the second quarter of 2010, based on year-over-year changes. Last quarter’s growth amounted to 4 percent.

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