The good news in the latest Congressional Budget Office report on the nation's long-term fiscal outlook is still pretty bad news. The upside is that the CBO has reduced the projected deficit for the 2012 fiscal year. The downside is that it's still expected to come in north of a trillion dollars. Unemployment is projected to drop, but only quite slowly, hovering above 8 percent through the end of next year and 7 percent through 2015. Spending on Medicare is growing slightly slower than expected. But that's probably because of some combination of a sluggish economy and structural factors that started before the recession. And when the economy eventually picks up speed and the new health care law goes into effect, that won't last for long.
Even though the numbers aren't as bad as they could be, in other words, they're still pretty bad. And they require attention and action from the legislators who control the federal purse strings. "The key issue facing policymakers is not whether to reduce budget deficits relative to those that would occur under current policies," said CBO director Douglas Elmendorf today. "The question is when; the question is how."
It won't be enough to simply cross our fingers and hope the economy recovers. "How much and how quickly the deficit declines will depend in part on how well the economy does over the next few years," the report states in its opening paragraph. But even more important "will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year under current law."
If Congress does nothing, then deficits are projected to shrink quite a bit in coming years. But not because the federal government will have shrunk spending down to match existing revenues. Instead, a substantial part of the fiscal gap that makes up our deficit will have disappeared because revenues are set to go up. This is another way of saying that, under current law, taxes are set to rise dramatically. According to the CBO:
Much of the projected decline in the deficit occurs because, under current law, revenues will rise considerably as a share of GDP—from 16.3 percent in 2012 to 20.0 percent in 2014 and 21.0 percent in 2022. In particular, between 2012 and 2014, revenues in CBO's baseline shoot up by more than 30 percent, mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the alternative minimum tax (AMT), and the imposition of new taxes, fees, and penalties that are scheduled to go into effect.
But the politics of middle class tax hikes mean that those revenue increases aren't likely to go into effect. Which means that the giant-sized deficits won't get much smaller—because spending will stay sky high. "Projected spending averages 21.9 percent of GDP over the 2013–2022 period," the report says, "a percentage that is less than the 23.2 percent CBO estimates for 2012 but that is still elevated by historical standards." So not only is the federal government set to spend an unusually large amount of money, it's probably going to be borrowed. Which means we'll continue to pile up debt. In the CBO's alternative fiscal scenario, which assumes that many of the tax and spending provisions set to occur under current law will not actually take effect, debt levels continue to increase rapidly. Between 2013 and 2022, deficits would run about 5.4 percent of the country's total economic output. Public debt would be equal to 94 percent of GDP by 2022—which the CBO notes is "the highest figure since just after World War II."
And that doesn't even begin to address the even larger and longer term problems with entitlements. No matter what happens with the collection of tax and spending policies set to expire at the end of this year, rising health costs and an aging population mean big spending and big fiscal trouble for Medicare, Medicaid, and, to a lesser extent, Social Security. And that a treacherous fiscal path. According to the CBO, "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 (rather than being allowed to increase, as under current law), the resulting deficits will increase federal debt to unsupportable levels."
That's all well and depressing enough on its own. But paired with the last week's worth of presidential campaign headlines, in which the two highest-profile men running for the top job in the federal government are competing to see who can cut Medicare the least, it's downright terrifying. Romney is now promising to restore funding diverted away from Medicare by ObamaCare, and Obama is charging that Romney will end Medicare. The really bad news is that one of these guys is going to win—but without any plan to avert the coming budgepocalypse. The question is when. The question is how. But neither of them has an answer.