Don't Get Excited about New Deficit Numbers

May 15, 2013

The Congressional Budget Office (CBO) released estimates showing that the federal budget deficit will not be as big as expected in FY2013:

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.

Ezra Klein declared that our debt and deficit problem “is pretty much solved, at least for the next 10 years or so.” Reuters’ Felix Salmon writes that the CBO’s numbers “will help us to stop bellyaching about the debt.”

We can celebrate, right? No.

First, a falling deficit only means the national debt isn’t increasing as fast. Because the federal government spends more than it gets in revenue, the debt continues to pile up. In the chart above, see how high the debt level is expected to be through 2020. Levels this high haven't been seen since the 1950s. As CBO points out, there are negative consequences to this:

When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges.

Second, former CBO Director and President of the American Action Forum, Douglas Holtz-Eakin looks beyond the headline number and sees that no one should jump for joy:

The big news is that CBO revised the current-year deficit projection down from $845 billion to $642 billion -- a shift that stemmed from two special, one-time, non-repeating, 2013-only (get the point?) factors: (1) a revision up of $105 billion in estimated tax collections and a $95 billion combined dividend payment from Fannie Mae and Freddie Mac.  For the entire 2014-2023 period, CBO changed its revenue projections by only $95 billion, so the good news is isolated to 2013.

Indeed, the 10-year deficit remains at $6.3 trillion, down ever so slightly from the $6.9 trillion projected in February.

The big driver of deficits remains spending over the next 10 years, especially the health and retirement programs -- Social Security ($10 trillion), Medicare ($8 trillion), Medicaid ($4 trillion), ObamaCare ($1 trillion), etc.  CBO left its outlook for that tsunami essentially unchanged.  The single largest revision was a projected drop of only $18 billion for Medicaid in 2023 and collectively the projected reduction was a minuscule 0.9 percent.

Third, CBO's 10-year projection doesn't assume any recessions. That would mean that the U.S. economy wouldn't experience a recession over a 14-year period. There hasn't been such a long period of uninterrupted growth in the post-World War II era.  Falling revenues and increased counter-cyclical spending caused by a recession would exacerbate our fiscal situation.

While the news of a smaller-than-expected deficit is welcome, it doesn’t mean we can avoid reforming entitlement programs. A harsh fiscal crisis is still impending if we don't.

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