The Congressional Budget Office released another report on the nation's debt and deficit picture today, and the short version goes something like this: We've made some short-term progress in reducing annual deficits, but the long-term debt picture is still quite bleak. It's the calm before the storm more than a sign that all is well.
There's no question that the fiscal situation is better than it was a few years ago. This year's budget deficit will clock in at just $506 billion—not a small amount, but far less than the $1 trillion overruns we saw during President Obama's first term. This year's deficit will even be slightly smaller, relative to the size of the entire economy, than is typical over the last four decades. Projected Medicare costs—a major driver of long-term debt—have continued to be reduced compared to the increases the CBO expected just a few years ago.
But some of those Medicare savings are based on cuts that, as Medicare's Trustees have hinted rather strongly, may not ever materialize. And some of them are based on projections of slowing health spending that could easily be wrong, as much of the slowdown has been attributed to the economy.
Meanwhile, even as annual deficits have declined, total federal debt levels have remained high. And they are expected to rise to unprecedented levels in the years to come. By the end of this fiscal year, the CBO says, federal debt held by the public will equal 74 percent of GDP, double its 2007 level, and higher than at any point since 1950. Then it gets worse. "The persistent and growing deficits that CBO projects would result in increasing amounts of federal debt held by the public," the report says. Starting in 2018, deficits start to rise above average levels again, pushing debt as a percentage of GDP up to 77 percent in 2024.
The higher the debt levels, the bigger the problems for the nation, especially when debt levels are this high. As the CBO notes (and has said repeatedly in previous reports), higher debt means higher federal spending on interest to maintain the debt, lower economic growth rates, less flexibility for policymakers in all matters, and an increased risk of a fiscal crisis. Basically, debt costs money to carry, and robs the nation of other options: the more a nation owes, and the more it spends on debt, the fewer choices it has to do other things, which creates a kind of precarious state in which really big problems—like a fiscal crisis—are more likely, and harder to deal with when they do occur. It's a fiscal feedback loop, and it's threatening to drag us down.
The Obama administration has tended to treat the recent decline in annual deficits as a kind of problem solved. It's not. The problem is a little smaller, but it hasn't gone away so much as been postponed. That's a good thing, but it's not enough.