The nation's budget challenges haven't changed

Reuters

Article Highlights

  • It is a mistake to think of the nation's budgetary challenge as something associated solely with the size of near-term deficits.

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  • The main effect of the run-up in deficits has been to remove all margin for error in economic policy.

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  • The core fiscal challenge for the country, which remains unaddressed, is the unrelenting growth of entitlement spending.

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It is a mistake to think of the nation's budgetary challenge as something associated solely with the size of near-term deficits. That was never the case.

Since the financial crash, the U.S. has run up extraordinary amounts of debt. Between 2009 and 2012, the U.S. ran a cumulative $5 trillion deficit. These enormous deficits were always going to recede when the nation's economy moved closer to normalcy again; it was just a matter of time.

It is also the case that some policy decisions have reduced the near-term deficit modestly as well. The president and Congress agreed to a tax deal earlier this year that raised revenue relative to the full extension of the Bush-era tax schedule, and the spending cuts associated with the sequester have been allowed to go fully into effect in 2013. The result is that the short-term outlook is now slightly less bad that it was a year ago. The Congressional Budget Office now projects that the federal budget deficit will total $642 billion in 2013 and $560 billion in 2014. Last summer, CBO was projecting that the deficit would remain over $1 trillion in 2013 and reach $924 billion in 2014. Those earlier CBO projections assumed full extension of the Bush-era tax schedule and elimination of the spending cuts required by the sequester.

The main effect of the run-up in deficits has been to remove all margin for error in economic policy. The nation's outstanding public debt is now over 70 percent of gross domestic product; if another crisis were to rattle to the world economy, the nation's debt level could easily soar past 100 percent of GDP, which would spell real trouble for the economy. The imperative to rein in near-term deficits even more remains because it is important to reduce the risk that another recession-induced run-up in borrowing would trigger a debt crisis with catastrophic consequences.

But the core fiscal challenge for the country, which remains unaddressed, is the unrelenting growth of entitlement spending -- a problem that will become acute in the next 20 years. Between 1973 and 2012, entitlement spending rose from 7.4 percent of GDP to 13.1 percent of GDP. By 2035, spending on Social Security, Medicare, Medicaid and the health care law's new entitlements is expected to add another 5.4 percent of GDP to the spending side of the federal ledger. Absent serious reform, the budgetary pressures created by this entitlement spending surge will either force massive cuts in the rest of the budget or very large tax increases, or perhaps trigger a debt crisis.

Medium- and long-term budgetary challenges can affect near-term economic performance. Large projected deficits, even 10 and 20 years into the future, can stifle near-term risk-taking and consumption as investors and households try to protect themselves from the damage that runaway government borrowing might trigger. Alternatively, if Congress and the president were to work together to close projected deficits in the medium and long-term, it would help the economy today by easing concerns about the future.

Despite a "less bad" near-term outlook, the nation's primary budgetary challenges haven't changed in the last year. There are still plenty of reasons to be concerned, and plenty of incentive to adopt a budget plan that substantially narrows future deficits.

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About the Author

 

James C.
Capretta
  • James Capretta has spent more than two decades studying American health care policy. As an associate director at the White House's Office of Management and Budget from 2001 to 2004, he was responsible for all health care, Social Security and welfare issues. Earlier, he served as a senior health policy analyst at the U.S. Senate Budget Committee and at the U.S. House Committee on Ways and Means. Capretta is also concurrently a Senior Fellow at the Ethics and Public Policy Center. At AEI, he will be researching how to replace the Patient Protection and Affordable Care Act (best known as Obamacare) with a less expensive reform plan to provide effective and secure health insurance for working-age Americans and their families.

  • Email: James.Capretta@aei.org
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