Deficit-Lede-02

Deficit Disconnect

By | Updated Aug. 27, 2014

For an  object lesson in the disconnect between Washington and the real world, the budget deficit is a good place to start. The recent recession’s contribution to the deficit accelerated complaints about red ink even without any sign that the country’s creditors are worried about the U.S. government’s ability to pay its bills. On Capitol Hill, politicians decry a “growing deficit.” The reality: The shortfall is melting like ice on a midsummer sidewalk and has been shrinking  as a share of the economy for five straight years. The government is projected to have spent $506 billion more than it took in during the fiscal year ending on Sept. 30. That means the deficit was 2.9 percent of gross domestic product, the smallest share since 2007. The Congressional Budget Office projects that it will fall to 2.6 percent in 2015.

The Situation

Though the process hasn’t been pretty, President Barack Obama  and his Republican opponents have shaved $2.6 trillion from the projected 10-year deficit through last-minute deals. About $2 trillion in automatic spending cuts are in place as part of the 2011 Budget Control Act, compared with about $600 billion in tax increases as part of last year’s fiscal-cliff agreement.  Together with new tax revenues generated by a growing economy, those moves have sopped up enough red ink so that the deficit is now on a course to grow more slowly than the economy, an important measure of sustainability. The government’s annual interest bill amounts to 1.4 percent of GDP, less than half what taxpayers paid when Ronald Reagan left the White House in 1989. That doesn’t mean there’s nothing to worry about. The long-term outlook remains troubling. After falling to about 2 percent of GDP in fiscal 2015, the deficit as a share of the economy will more than triple by 2038, according to the CBO.

The Background

 

Deficit decriers — including Reagan — often noted that no business would survive by running its finances in the same way as the government. Yet the historical reality is that the government doesn’t often balance its books. The U.S. has run surpluses in only 12 of the last 73 years. The deficit surged during World War II before peacetime brought three years of surpluses from 1947-1949. The prosperity of the Clinton years brought surpluses, though a $128 billion surplus in fiscal year 2001 turned into a $157 billion deficit a year later following a brief recession and the upheavals of the Sept. 11 terror attacks. The far bigger recession triggered by the global financial meltdown of 2008 meant that Obama entered office in the midst of a four-year run of trillion-dollar deficits that ended in fiscal 2012.

The Argument

The deficit wars subsided briefly in December following the 16-day government shutdown two months before, as Republicans and Democrats passed a budget deal without a crisis for the first time in years. But the agreement was minuscule and didn’t change the terms of the conflict. The CBO says that federal debt will remain roughly stable until around 2024, when the last of the 76 million baby boomers approach retirement age, placing new demands on Social Security. Some economists say that the pain will arrive much sooner, when interest rates rise from current low levels, accelerating the government’s annual interest burden. That’s an argument advanced by fiscal hawks such as Erskine Bowles and Alan Simpson, who led a deficit reduction committee appointed by Obama, and their ideological allies at think tanks like the Peter G. Peterson Foundation and Fix the Debt. The Simpson-Bowles plan recommended a 3-to-1 ratio of spending cuts to tax increases, a principle that many Democrats see as a dismantling of the U.S. social safety net.  The question is whether it makes sense to haggle now over changes in vital government programs based on the highly inexact science of projecting the 2038 deficit.

 

The Reference Shelf

  • Bloomberg Visual Data’s chart shows which countries are reducing their debt load the fastest.
  • Ronald Reagan’s first inaugural address in 1981, decrying deficits.
  • The Bipartisan Policy Center’s critique of the “dangerous” effects of the sequester.
  • A September 2013 Congressional Budget Office assessment of the fiscal situation.
  • Historical budget tables from the White House.
  • Text of the Murray-Ryan budget agreement in December 2013.

This QuickTake reflects a corrected reference to the advocacy groups Fix the Debt and the Peter G. Peterson Foundation, which call for reducing the federal government's long-term debt, not for requiring its budget to be balanced.

(First published Dec. 17, 2013)

To contact the writer of this QuickTake:

David J. Lynch in Washington at dlynch27@bloomberg.net

 

To contact the editor responsible for this QuickTake:

Jonathan I. Landman at jlandman4@bloomberg.net