The new budget and economic outlook released by the Congressional Budget Office addresses the biggest shortcomings in previous projections. And the more realistic picture it paints is moderately encouraging: The deficit dips as low as 2.4 percent of gross domestic product in 2015 before gradually rising to 3.8 percent by 2023.
Unfortunately, just 15 minutes after the CBO report came out, President Barack Obama delivered a budget statement that, in highlighting the fiscal paralysis in Congress, was simply depressing. Instead of attacking unemployment and our long-term fiscal imbalances with a combination of upfront stimulus and delayed austerity measures, we’re likely to wind up with the federal budget equivalent of living paycheck to paycheck, with rolling two- or three-month budget deals.
First, let’s get back to the good news. CBO’s projections increasingly reflect the slowdown in health-care costs that I’ve highlighted in many previous columns. As CBO writes, “In recent years, health care spending has grown much more slowly both nationally and for federal programs than historical rates would have indicated.” In response, the agency has lowered its projections for Medicaid and Medicare spending.
These revisions are significant, given how enormous a role Medicare and Medicaid play in the U.S.’s long-term fiscal imbalance. Consider that, five years ago, CBO projected Medicare spending in 2018 would amount to 3.9 percent of GDP. Now, in part because CBO assumes slower cost growth, it puts 2018 Medicare spending at 3.5 percent of GDP. That difference has about the same impact on the budget as did the upper-income tax cuts that expired as part of the fiscal deal reached on Jan. 1.
CBO should also be commended for reducing its long-term economic growth rate to be more in line with outside projections. Last week, I noted that the budget office was assuming long-term growth would be 2.4 percent, compared with a credible estimate of 2.1 percent from an economist at the San Francisco Federal Reserve. In its new report, CBO reduced its assumption to a more reasonable 2.2 percent.
To be sure, the numbers are still biased by certain unrealistic assumptions the agency is forced to use. It no longer needs to assume an end to all the George W. Bush tax cuts, as it did before the Congress made them permanent for all but the highest-earning Americans. Nor does it need to figure that the alternative minimum tax will take over the tax code -- never a realistic scenario.
Yet the same kind of bias remains on the spending side. The official projections must assume that, by 2023, discretionary spending (the part of the budget set each year by Congress) will fall to 5.5 percent of GDP. That’s more than 3 percent of GDP below the average from 1973 to 2012. Any bets on whether Congress will actually stick to this path?
It’s also notable that the CBO projections contradict claims, popular among progressive analysts, that deficit spending when the economy is extremely weak has no adverse impact on, and possibly even benefits, the long-term debt picture. If that were the case, CBO’s projections would show that the debt the U.S. has been running up over the past several years -- from 36 percent of GDP in 2007 to 72 percent of GDP in 2012 -- would be gradually reversed. Instead, CBO shows that the run-up is basically permanent, with debt hovering around 75 percent of GDP for the next decade.
So stimulus spending, even when the economy is very weak, isn’t free. Nevertheless, it’s still a very good idea.
All of which explains why the budget discussions coming out of Washington are so depressing. CBO is projecting the unemployment rate to remain above 7.5 percent through the end of 2014. That could be attenuated with another aggressive round of stimulus spending.
On the other hand, and despite the encouraging news on health-care costs, the fiscal picture in the medium- and long- term remains dark -- especially with more realistic assumptions on discretionary spending. Because of that, and because additional stimulus is unfortunately not free (at least under CBO’s analysis), I will continue to argue for a barbell strategy.
The best path forward is a comprehensive fiscal deal combining upfront stimulus with delayed but credible austerity. To Republicans who deny the benefits of the stimulus side: How else would you bring the unemployment rate below 7 percent by the end of this year? And to Democrats who don’t want any entitlement reform: What makes you think no changes will ever be needed? And, in any case, why risk immediate austerity, which may be forced upon you by avoiding delayed austerity?
The bottom line is that the more realistic CBO projections still show that unemployment remains stubbornly high and our fiscal outlook is problematic. The barbell takes care of both problems. Two-month budget deals address neither.
(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)
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