There's Nothing to Celebrate When It Comes to the Deficit
The cheers for near-term deficit reduction are premature
June 13, 2013
No – because the structural drivers of the nation's fiscal challenge persist. This value judgment does not, however, argue in favor of more short-sighted deficit reduction, be it in the form of tax rate increases or ill-prioritized discretionary spending cuts. Rather, reforms should be pursued now to the nation's health and retirement systems to ensure lasting solvency of the programs in particular and the federal government in general.
The right "balance" of deficit reduction might well increase the near-term deficit slightly (relative to the current baseline) if, for example, sequestration is exchanged for structural reforms to Social Security or Medicare. This may alter the relative size of the near-term deficit and the composition, but would do so in a way to assure that the deficit persistently shrinks over time.
Many budget observers celebrated the changes in the near-term deficit outlook in the Congressional Budget Office's most recent projections. But those cheers were misguided. None of those changes were the result of better growth expectations or policy changes. Instead, the near-term improvement was largely the result of tax planning and large one-time payments from Fannie Mae and Freddie Mac - payments that may well run afoul of broader public policy interests.
What we're left with is a fiscal trajectory that will see interest costs more than double and mandatory spending reach over 60 percent as a share of the federal budget by 2023. The former bears particular concern. Irrespective of any future deficit concerns, the nation's debt load has grown such that the costs of servicing existing obligations are sure to crowd out other federal priorities. Meanwhile, Social Security and Medicare are cash drains on the federal Treasury, while promising indiscriminate benefit cuts when the trust funds run out. These are the most pernicious elements of the nation's fiscal outlook and none of the recent "good news" addresses them.