Feeling a little too upbeat? A little happy, or satisfied with the state of the world? The Congressional Budget Office has a cure for you. This year’s Budget and Economic Outlook—the budget office’s annual preview of projected federal spending, revenues, and deficits over the next decade (or, as I like to call it, the Budgepocalypse)—begins with the following line: “The federal budget deficit—although starting to shrink—remains very large by historical standards.” How large? According to the latest number, “the federal budget will show a deficit of nearly $1.1 trillion in fiscal year 2012.” That’s roughly seven percent of America’s total gross domestic product—a couple points below last year’s megadeficit, but, the CBO notes, “still higher than any deficit between 1947 and 2008.”
In 2012, the agency projects that the federal government will spend about 23.2 percent of our total economic output. But it will only bring in revenues equal to about 16.3 percent of the economy. That mismatch is what creates our deficit. Keeping that mismatch, or something like it, going year after year is what creates our long-term debt. Now, liberals might say that the problem is that we don’t tax enough. But remember: Even when top tax rates were much higher, we’ve never managed to tax that much. The federal government has never once collected revenues in excess of 20.9 percent of GDP (and that was a one-time deal). Overall, it has averaged about 18 percent since World War II, regardless of tax structure or top tax rates. Which means that we’re not just spending more than we’re taking in now; we’re spending more than we’ve ever managed to take in. And the projections show that we’re planning to spend even more.
Now, it’s true that current law, and thus CBO’s “current law” baseline, calls for us to tax even more, and to cut some hundreds of billions in spending on physician payments out of Medicare: But that’s because current law assumes that we’ll cut payments to physicians by nearly 30 percent in a few months, despite years of both parties supporting overrides to such cuts. And it assumes that tax hikes, including allowing the Alternative Minimum Tax, which was originally designed to hit just 55 very wealthy earners, will eventually hit half the country (meaning much of the middle class)—something neither party is going to support.
As is now common, liberal wonks are pointing to the baseline scenario as evidence that we don’t really have a deficit problem. After all, Congress just has to follow current policy in order to keep revenues nearly in line with expenditures. But even forgetting about the country’s historical inability to raise tax levels substantially above 20 percent of GDP, there’s simply no plausible near-future political environment in which this happens. It’s a cute fantasy designed to comfort those who don’t want to cut federal spending.
And ultimately, it’s the increases in spending that kill us: “If that rising level of spending is coupled with revenues that are held close to the average share of GDP that they have represented for the past 40 years...”, the CBO says, “the resulting deficits will increase federal debt to unsupportable levels.”
As usual, the CBO says there are three basic ways out of the current deficit mess: "To prevent that outcome, policymakers will have to substantially restrain the growth of spending for those programs, raise revenues above their historical share of GDP, or pursue some combination of those two approaches.” Liberals might take comfort in the thought that we can fix the budget through tax hikes. But as I’ve written before, they shouldn’t. Tax hikes may not bring in enough revenue. And regardless, any tax hikes big enough would represent a unprecedented increase and fundamental change in the American tax burden—and wouldn’t be politically plausible. At some point, then, the federal government will have to substantially cut spending; the sooner the better.