The Congressional Budget Office’s new 10-year Budget and Economic Outlook, released this morning, is truly the bearer of bad news. Compared with CBO’s previous outlook, released last May, spending over the next decade is projected to fall, revenues are projected to dramatically fall, and economic growth is projected to plummet.
On the spending side, a combination of policy changes and slower projected economic growth has led to a downward revision of $594 billion in projected outlays over the next decade. And on the other side of the ledger, projected federal revenues have decreased by $1.4 trillion, all due to newly anticipated slower GDP growth and lower inflation (not to mention a further $200 billion decrease in revenues due to technical corrections). The result is almost a $1 trillion increase in federal deficits over the next ten years.
As this morning’s CBO numbers make clear, economic growth is the largest driver of federal revenue, and hence, the key to bringing down deficits. In the short-run, spurring more growth through fiscal policy is easy from an economic perspective—allow the budget deficit to rise to finance spending that spurs aggregate demand in our still demand-starved economy, fostering a full recovery from the Great Recession. In the longer run, improving overall productivity and growth is key. As the CBO report states, “if the growth of real GDP and taxable income was 0.1 percentage point higher or lower per year than in CBO’s baseline projections, revenues would be roughly $270 billion higher or lower over the 2015-2024 period.”
So how did we get in such dire straits regarding growth?
While commentators on the right are already suggesting that a larger projected deficit means Congress should cut spending (especially from federal health programs), the truth is that we’ve already tried our hand at reducing the deficit via spending cuts. And simply put, it hasn’t worked. Today’s deficit projections are far worse than they were even before the sequester cuts took effect because of the marked-down growth projections. Moreover, projected spending on federal health programs has actually decreased: since last May’s projections, anticipated federal spending on health care programs has dropped by $364 billion. This is actually part of a trend, as CBO’s 2013 projections foresaw a 10-year decrease in combined Medicare and Medicaid spending of $544 billion.
So if a slowing economy, not speeding health care costs, is the largest factor in an increasing medium-term deficit, what should policymakers do now?
To quote Larry Summers’s reaction to the last CBO report on our stagnant economy: “The U.S. must embrace a growth agenda.” Indeed, CBO’s projections that “weakness in the labor market will persist” in the near term should induce policymakers to not only to strengthen economy-boosting automatic stabilizers like unemployment insurance and food stamps, but also to reverse the discretionary spending cuts that have curbed public investment and employment.
In the longer term, we should ensure we’re not hamstringing productivity growth by slashing valuable public investments. In 2014, CBO anticipates nondefense discretionary spending to be $20 billion less than it was in 2013, including a 62 percent reduction in funding for community and regional development and a 12 percent decrease in discretionary transportation funding. Over the next ten years, CBO’s projections anticipate $340 billion less in discretionary spending than they did a year ago. Using methodology described by EPI’s Ethan Pollack, this difference equates to a downward revision of $152 billion in public investment—spending CBO describes as funding that “contributes to the economy on an ongoing basis by improving the private sector’s ability to invent, produce, and distribute goods and services.” Instead of a reason our deficit is growing, non-defense discretionary spending levels have actually contributed to a too-steep drop in the deficit and are holding the economy back.
Today’s CBO report shows the public debt-to-GDP ratio rising from 72.1 percent today to 78 percent at the end of 2023, rather than the 71.1 percent that was projected last year—a difference almost completely attributable to projections of a more slowly growing economy. With slow economic growth at fault for increasing deficit projections, rather than the other way around, policymakers must reverse course, backing away from austerity and instead pursuing an agenda to increase public investment and job growth, both in the near- and long term.