Don't Care About the Deficit? Now You Should

I’ve said it before and I’ll say it again: Outside a few lonely hawks, no one cares about the budget deficit. Unfortunately, in the near future, we may not be able to afford the luxury of not caring.
It's not about health-care costs.

I've said it before and I'll say it again: Outside a few lonely hawks, no one cares about the budget deficit -- at least, not as long as they have any chance of getting some tax cut, or some spending, that they favor. Liberals were huge budget hawks in 2007, outraged about the George W. Bush deficit that was, by that point, running a little more than 1 percent a year. Fast-forward to 2014, when the Bush tax cuts have been partially repealed, helping President Barack Obama to slash the budget deficit to its lowest point in his administration -- 4 percent -- and the left is curiously uninterested in deficit reduction. Meanwhile, the Republicans who couldn't be bothered with the deficit as long as it was going to fund tax cuts have suddenly rediscovered their inner accountants. Should the presidency flip parties, so will the outrage, with depressing predictability.

Unfortunately, as a new Bloomberg News article suggests, in the near future, we may not be able to afford the luxury of not caring. Congressional Budget Office projections currently show the deficit beginning to grow again in 2016, just in time for the presidential election. By 2019, it'll be above its historical average, where it will stay until the end of the forecast window -- and that historical average is itself a bit high, as it includes the post-war record deficit of the Obama administration, which ran close to 10 percent for several years.

If the growth in health-care costs continues to moderate, that may help a bit, but mostly, the rising cost of health care is not the problem. The problem is the rising number of aging citizens who will require Social Security benefits, Medicare and, eventually, Medicaid to pay for their nursing homes. For the next decade or so, it is demographics, not compound cost growth, that will account for most of our budget problems. And you can't fix the demographics by directing providers to charge 2.9 percent less for their senior citizens.

As the Bloomberg article points out, there's another factor that's going to drive deficits, one that few people are talking about in the public-policy sphere: As the Fed tightens up on monetary policy, our borrowing costs are going to rise, not just for the new debt we take on, but also for the debt we already have. As old debt matures, we've been borrowing at record-low interest rates, which has helped hold down the deficit. But as the Fed tightens, that party will end, and the numbers will start moving in the other direction. This will take time -- the Obama administration has been actively working to lengthen its debt maturities in order to take advantage of the low rates. But in future years, this will place constant upward pressure on our deficit.

With the Fed expected to begin tightening next year, and our demographic pressure beginning to press harder, the deficit may once again show up as an issue in the 2016 election. And it will certainly show up as an issue for the next president, who is going to have to make painful spending cuts -- or tax increases -- if they want room in the budget for any new initiatives. Those moves will be unpleasant, unpopular and unwillingly undertaken. The days when Democrats could promise to fund everything with tax hikes on a handful of rich people, or Republicans could promise to handle it all by cutting welfare fraud and foreign aid, are now officially at an end.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.