Last week, in his final State of the Union address, President Obama boldly declared: “Anyone claiming that America’s economy is in decline is peddling fiction.”
He highlighted, among other things, the government’s falling annual deficits. Of course, these deficits fell from highs earlier in his presidency, and only thanks to budget limits his administration and many Republicans now oppose, but I digress. Obama’s suggestion was that any remaining concern over deficits was little more than partisan grumbling.
Awkwardly for the president, a new Congressional Budget Office Budget and Economic Outlook came out today. It’s another timely reminder that the nation’s economic future isn’t necessarily bright.
The report isn’t all bad news. Economic output will continue to grow, expanding “solidly” this year and next, and then at a slower rate in future years based on a shrinking labor supply. Overall, though, “economic developments since [the agency’s last report in] August point to a weaker outlook for output growth over the next few years.”
More troubling, though, is what happens with spending and debt in the very near future. For the first time since 2009, the deficit-GDP ratio will rise faster than GDP itself. In other words, deficits are growing faster than the economy. What’s more, this projected deficit will hike debt held by the public to 76 percent of GDP by the end of this year – or higher than it’s been since just after World War II:
Despite the claims of some pundits, high liabilities do not, necessarily or immediately, spell doom for the economy: “sky-is-falling” approaches are hardly helpful. But as the CBO and others consistently warn, such high levels of debt do not come without consequences – “dampening” economic growth, creating more vulnerability to rising interest rates, even producing an eventual fiscal crisis if the situation is not brought under control.
What is causing this? In the simplest terms, the country has a spending problem, which is getting worse, and quickly. In August, the CBO projected a cumulative deficit about $1.5 trillion less than today’s projections.
As the CBO notes, “About half of the $1.5 trillion increase stems from the effects of laws enacted since August.” These laws hike spending by $324 billion between 2016 and 2025, and add $749 billion to projected deficits.
In other words, fall’s last-minute budget package, the one that thumbed its nose at budget limits and summarily forgot about reforms passed back in March, might have faded from the headlines, but its consequences are here to stay.
Meanwhile, thanks to an aging population and rising health care costs, mandatory programs will continue to strain the economy and push up costs. These liabilities will rise to a startling 15 percent of GDP by 2025, and most serious reforms remain elusive.
It would be all too easy to point fingers at one party or president for this mess. Obama and the Democrats certainly share the blame, but with a sizable portion of congressional Republicans equally hell-bent on rolling back budget limits, and most presidential candidates not even pretending they care about spending anymore, it’s clear there’s enough blame to go around.