In the long run, the President’s budget proposal would make the economy worse relative to the current budget baseline, according to a new report from the Congressional Budget Office. The White House and its allies will no doubt seize on the CBO’s estimate that next year economic output would be between 0.6 and 3.2 percent under the president’s framework.
But I suspect the administration will be less keen to note that later on in the next decade, between 2018 and 2022 (at which point the country’s total economic output is expected to have surged past the $20 trillion mark), the country’s overall economic output would be between 0.5 and 2.2 percent lower than under the baseline scenario. Artificial economic boosts, fueled by debt, can juice economic output in the short term. But there are real economic costs in the long run.
Now, it’s true that CBO is comparing the president’s budget framework to the current budget baseline, which unrealistically assumes that many of today's policies stay unchanged and are enacted in full. Specifically it assumes that Medicare payments take a huge drop, the Bush tax cuts expire for everyone, and the Alternative Minimum Tax goes unchanged, hitting more and more middle class earners.
You can take this as evidence that policymakers ought to simply let this scenario play out, letting tax rates rise on everyone. But what it mostly tells us is that we need to close the fiscal gap sooner rather than later, and that finding ways to reduce the size of the federal government’s budget deficits quickly pays off substantially over time.