The Congressional Budget Office (CBO) released the spring update of its baseline budget projections today. The news is mixed, but it tells more or less the same story as the past five CBO updates—things may be better in the short run, but real fiscal distress looms in the not-too-distant future.
CBO’s deficit estimates for this Fiscal Year (FY2014) declined to $492 billion, down slightly from $514 billion in their February estimate. As the report notes, “this will be the fifth consecutive year in which the deficit has declined as a share of GDP“ (Gross Domestic Product). In FY15, CBO predicts that the deficit will drop slightly again—to $469 billion.
That’s the end of the good news in the report. However, as CBO notes:
…but if current laws do not change, the period of shrinking deficits will soon come to an end. Between 2015 and 2024, annual budget shortfalls are projected to rise substantially…mainly because of the aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.
CBO’s baseline federal debt held by the public, not the gross public debt nor the statutory debt limit which has garnered the headlines of the past four years, will reach 78 percent of the economy. That’s twice the 39 percent average of the past 40 years. The gross public debt already exceeds 100 percent of GDP.
This warning appears, in similar fashion, in almost every CBO report from the past five years. And CBO’s warning continues: “Such high and rising debt would have serious negative consequences…and increases the risk of a fiscal crisis in which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”
Yes, CBO writes that about the United States; not about Greece nor Venezuela nor Chad nor Ukraine, but about the nation that holds the reserve currency of the world and once was considered the most credit-worthy nation on the globe.
This estimate emerges despite all the drama of the past five years on the fiscal front. Washington, D.C., and most of the public to judge by recent polling data, no longer wants to talk about deficits and debts and all those “so last year” things.
CBO assumes, as it always has, that nothing bad happens over the next 10 years—no recession, no overseas conflicts that increase defense spending, no jump in interest rates, unemployment declines to normal levels, and no national emergencies such as hurricanes or earthquakes.
And that is what is most worrisome about the CBO report. The next 10 years will be a large “reversion to the mean,” in the agency’s projections. If the nation goes without a recession for the next 10 years, without overseas conflicts of any type, no national emergencies, and a recovery throughout the globe, then its projections, nasty as they are on the fiscal front, may actually happen.
Remember this, though: since World War II the United States has NEVER seen such a decade. If history holds true, things will be worse than CBO projects. Once deficits start rising again, policymakers will have little time to change course. With every passing year, policy remedies to fiscal folly will exact a more acute and more widespread pain.