Recently, the Congressional Budget Office (CBO) released its annual budgetary outlook that projects government finances and economic direction into the next 10 years. The document details the anticipated debt, revenue and expenditures of the federal government’s operations under its current trajectory. While highly speculative, the report does deliver an insight to the anticipated budgetary effects of current legislative policy.
Unsurprisingly, this year’s report is anything but optimistic.
Nevertheless, the CBO’s report details both good news and bad news when it details anticipated future budgetary blowouts. It prophesied a shrinking annual budget deficit of $1.15 trillion in 2012 to a comparatively miserly $433 billion in 2015 resulting from increased revenue from higher taxes combined with budget sequestration and a stronger economy. For the first time, President Obama is projected to preside over a less-than trillion dollar deficit in 2013—one of only $872 billion.
Only in our truly desperate fiscal situation can such numbers be seen with relief.
Further, despite an economic decline of 0.1 percent in Q4 of 2012, economic activity is projected to shoot to around 3.5 percent through 2018, while unemployment is also projected to drop to around 5.5 percent during the same time. Of course, all of these presumptions rest on the promise of strong future economic growth, a chimera that economists and politicians have been trumpeting since 2009 with meager result.
Despite a near-term rosy economic picture, serious debt issues will soon emerge like the resurgent heads of Hydra after 2015. From then until 2023, annual budget deficits are projected to grow from $430 billion to $978 billion, and thereafter to rise with no end in sight as entitlement costs grow with an aging population.
By 2023, the federal budget is projected at $5.9 trillion, with $3.7 trillion going to Medicare, Social Security and other mandatory spending. Discretionary spending, encompassing everything from federal highways to the military, will climb to $1.4 trillion while annual debt interest payments will rise to $857 billion per year.
In short, despite the prognostication of a strong economy and record tax revenue, the federal government is again projected to run chronic trillion-dollar deficits within 10 years.
Unfortunately, there are reasons to remain skeptical of the government’s future financial state. First, the report assumes strong economic growth and surging tax revenue beginning in 2014, but previous hopes for 3 percent growth or greater have fallen flat for the past half-decade, and continuing recessions in Europe and Japan bode poorly for domestic economic recovery.
Secondly, the report implicitly assumes that the Congress will not reauthorize, as it has for years, the “doc fix” that avoids steep payment cuts for doctors who treat Medicare recipients. It assumes the debt limit will be reapplied in May and that the dreaded sequester will be fully implemented, which President Obama now seeks to reverse. It also fails to take into account the future possibility of expensive wars, bond yields rising beyond 5 percent, and high inflation.
Most glaringly, it also assumes that there will be no recessions between now and 2023, which would simultaneously skyrocket government expenditures and plunge revenue. Given that the average recessionary cycle since the Depression has been less than five years and current economic growth is barely above stall-speed, saying that 2009 through 2023 will be recession-free is optimistic indeed.
For an enlightening comparison, the CBO detailed 10 years ago the nation’s projected economic and fiscal state through 2013. The report optimistically surmised, as of this year, the government would be enjoying its seventh consecutive year of budget surpluses, with 2013’s budget in the black by $508 billion. Meanwhile, the public national debt would have atrophied to $2.6 trillion, a meager 14.4 percent of GDP, while the economy would have grown at a rapid annual 5 percent clip to an annual 2013 GDP of $18 trillion.
Instead, the nation is now awash in more than $16.5 trillion in gross debt, more than 100 percent of an actual GDP of $16 trillion, while the last several years have been marred by economic shrinkage followed by 1 percent and 2 percent annual growth.
Why the discrepancy?
Through no fault of its own, the CBO failed to incorporate the fiscal and economic consequences of Iraq and escalated Afghan War, Medicare Part D, the Great Recession, the housing bust, the European Sovereign Debt Crisis, TARP, the Stimulus, Fannie Mae and Freddie Mac bailouts, Obamacare, Dodd-Frank, glacial economic growth, record unemployment and other unpredictable calamities that occurred over the last decade. Hopefully there will be fewer expensive surprises over the next 10 years, but don’t hold your breath.
As the CBO unfortunately illustrates, even the most optimistic budgetary scenario leaves the nation saddled with annual trillion-dollar deficits within 10 years. The overwhelming driver of this crisis is runaway entitlement spending coupled with anemic economic growth and rising bond yields. With their own aging populations, much of Europe and Japan is also grappling with similar dilemmas and helpfully displays the societal catastrophe that occurs when politicians promise voters more than their economies can produce and governments can redistribute.
Without major and radical reform, a future American dystopia awaits our current myopic society.