CBO: Don’t Fear the Near-Term Debt Reaper
This morning, the Congressional Budget Office released its latest long-term budget outlook. While CBO projects the federal debt to begin increasing sharply in future decades, the main takeaway is that, with the debt stable for the remainder of this decade relative to the size of the economy, Congress should not see these projections as a reason to double down on economy-stunting austerity. Instead, policymakers should take advantage of our fiscal health to make the investments necessary to help boost our demand-starved economy and our still-flagging labor market.
CBO expects annual deficits to range from 2.8 to 3.5 percent of GDP through 2020—down from a peak of 10 percent of the economy in 2009—and not to reach 4.5 percent again until 2027. Yes, says CBO, over the long run our debt is a problem, especially as health care costs truly escalate in coming decades. And yes, CBO assumes that certain tax and spending policies will lapse when they will in all likelihood be extended, meaning today’s projections of future deficits are too low. But while our recent political past is strewn with the carcasses of failed grand bargains, fiscal commissions, and super committees, this near-term picture shows us that our deficit hysteria has calmed for good reason—there is no near-term deficit problem.
Let’s look at it this way. Since the Simpson-Bowles fiscal commission released its final proposal in December 2010, actual and projected budget deficits have fallen by $2.2 trillion over the 2011–2020 window, compared to the baseline the fiscal commission was working with—even with no bipartisan grand bargain over the budget.
How has this happened? A mix of poor policy choices and good fiscal news has given our budget some fiscal breathing room.
The poor choices: The biggest chunk of our near-term deficit reduction is also the most odious—the draconian “sequester” cuts. Devised in the Budget Control Act of 2011 (BCA), sequestration instituted spending caps and sharp spending cuts to put a vise-grip on “discretionary” spending—that is, spending on education, transportation, defense, housing, and more. In other words, everything that the government spends money on that is not contributing to the federal government’s long-term debt problem, the problem Congress was ostensibly addressing when it passed the BCA in the first place. The BCA was originally set to reduce deficits by $1.2 trillion by 2023, though subsequent legislation has extended the cuts even further.
The good news: Though the cost of federal health care programs— Medicare, Medicaid, Affordable Care Act subsidies, and some smaller programs as well—is still growing quickly, and will present budgetary constraints over the long term, CBO has revised its cost projections for these programs downward every year since the Simpson-Bowles plan was released. Since 2011, CBO’s projections of federal health care spending have been revised downward by more than $830 billion over the 2011–2020 window. If deficit hawks thought that $1.2 trillion of deficit reduction was needed when devising the BCA, and more than two-thirds of that amount vanished from our health care cost projections, doesn’t that make the sequestration spending cuts three times larger than even their proponents wanted them to be?
The smallest bite we’ve taken from the deficit apple was the tax increases President Obama signed into law at the beginning of 2013 in the deal to avert the “fiscal cliff,” the largest part of which increased income taxes by less than 5 percentage points beginning on wealthy individuals’ 400,000th dollar of income. In total, the deal increased revenue by about $600 billion over ten years, or just one-fifth of what would have been raised if Congress allowed the Bush-era tax cuts to expire completely.
While conservative policymakers and their allies still use the deficit as a rhetorical crutch for not increasing necessary public investments, the truth is that both parties seem to have internalized that the current fiscal environment is one in which deficit spending can be OK. Unfortunately, members of Congress of both parties only seem to be willing to deficit finance hugely expensive corporate tax breaks, and not items that have a good bang-to-buck ratio, such as unemployment benefits or infrastructure projects.
The New York Times’ Josh Barro puts this best: “Interest rates are low, investors are clamoring to lend money to the United States and federal debt is projected to be a stable share of the economy over the next 10 years. This is a good time to borrow money and to spend the proceeds on useful highway construction.” However, Congress has long taken the wrong lesson from these long-term projections. While CBO makes clear in today’s report that policymakers must act to control the long-term debt (which really means controlling health care costs—of which escalating projections for Medicare and Medicaid are largely a symptom, not the cause—and increasing revenue, like every other advanced country has in recent decades), Congress must not use this report to reach into its old bag of austerity tricks and cut needed short-term spending that has nothing to do with the long-term debt.