The Congressional Budget Office released “good news” Tuesday with its “Updated Budget Projections: Fiscal Years 2013 to 2023.” A combination of increased revenues and lower spending will cut the federal deficit to about half the size it was in 2009 and as low as 2.1 percent of Gross Domestic Product (GDP) by FY 2015.
At first glance the CBO report seems to validate recent comments in the nation’s capital that the federal fiscal situation is not a crisis and doesn’t require immediate action by policymakers.
But, CBO states clearly that under current law, federal debt held by the public will rise to 74 percent of GDP by 2018 and continue upwards in the next decade “with serious negative consequences.” We fear that declining deficits in the short run—the good news—will overshadow the bad news—we face a looming fiscal crisis that needs to be addressed now, giving time for reforms to be phased-in over time.
The report, moreover, serves as an indictment of our nation’s recent chosen form of debt reduction – a sequester that cuts deep immediately while doing almost nothing to control long-term deficits. In fact, the sequester leaves non-interest spending completely untouched after 2021.
The enthusiasm for fundamental tax and entitlement spending reform already seems to be waning on Capitol Hill. Selective use of the CBO report could dim whatever hopes remain for a major fiscal reform package this Congress.
Perhaps the most important part of the report are the summary points in the document:
“For the 2014-2023 period, deficits in CBO’s baseline projections total $6.3 trillion. With such deficits, federal debt held by the public is projected to remain above 70 percent of GDP—far higher than the 39 percent average seen over the past four decades… Such high and rising debt later in the coming decade would have serious negative consequences. When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially…Finally, a large debt increases the risk of a fiscal crisis during 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.”
As the Bipartisan Policy Center’s Debt Reduction Task Force has warned, Congress must act now to begin to phase in policies that increase revenues and reduce entitlement spending. Given the still tepid economic recovery, reforms should be phased in slowly, but by acting now, Congress would allow citizens to make adjustments in their expectations and would avoid the dire consequences CBO outlines. Congress would also fulfill its responsibilities to avoid the fiscal crisis that CBO outlines, most of which will fall on the future generations.
In short, CBO’s report should be taken as a warning to Congress, not an endorsement of continued inaction.