The economic and budget challenges facing the nation have become much more manageable recently. New analysis from my Center on Budget and Policy Priorities colleagues shows that, if policymakers had the political will, they could realistically enact a package of policies that will not only give the sluggish economic recovery a needed boost in the near term, but also put the debt on a declining path as a percent of the economy.
The Obama administration's "Mid-Session Review" of the budget, which it released Monday, shows that the budget deficit is falling and that the president's budget proposals would put debt on a declining path as a percent of the economy after 2015. In addition, the non-partisan Congressional Budget Office's latest "baseline" projections show that, under current tax and spending laws, debt would be a lower percentage of GDP in 2023 than it is now, but it would be rising gradually by then rather than declining.
As I discussed here recently, the budget outlook to 2040 also has improved dramatically since CBO made its last long-term projections a year ago – although policymakers still must act to put the debt on a downward rather than gradually rising trajectory. CBPP's new analysis looks at how much deficit reduction is needed over the coming decade to do that.
As the CBPP analysis explains, policy changes since the late fall of 2010 – when the co-chairs of the president's Bowles-Simpson commission first outlined the need for several trillion dollars of deficit reduction, have significantly reduced future deficits and debt. Non-policy changes, such as better economic conditions and slower than expected growth in health care costs, have also improved the budget outlook since 2010.
The key policy actions have been cuts in discretionary (non-entitlement) spending, achieved primarily through limits (caps) that policymakers imposed under the Budget Control Act, and savings from their decision to allow some high-income tax cuts to expire in the American Taxpayer Relieve Act of January 2013. The chart below shows the impact of those policy changes, comparing CBPP's projected debt path under current policies with what that path would be under 2010 policies.
CBPP analyzes a number of scenarios for further deficit reduction. Scenario 1 (in the chart) illustrates that, as a matter of arithmetic (and not based on specific policies), an additional $900 billion of deficit reduction would stabilize the debt after 2018 at 72 percent of GDP, slightly below its level in 2012. In February, before CBO releases its latest projections, CBPP had estimated that $1.5 trillion would be needed.
CBPP's current policy trajectory assumes policymakers cancel the sequestration budget cuts from 2014 on. Maintaining sequestration would generate $1.1 trillion in savings – more than the $900 billion needed merely to stabilize the debt. Sequestration's meat-axe approach, however, imposes front-loaded deficit reduction that leaves debt on a rising path at the end of the decade. That's bad for the recovery and bad for longer-term deficit reduction. CBPP shows that a more balanced approach with an equivalent amount of back-loaded deficit reduction would put the budget on a better trajectory going into the next decade.
CBPP has an even more intriguing version of this story when it looks at two different ways of achieving the $1.5 trillion of deficit reduction that, in February, it thought was needed to stabilize the debt. Scenario 4 in the chart below simply applies the February deficit-reduction path to the new baseline. Scenario 5 illustrates a deficit-reduction plan that includes an up-front $250 billion jobs program offset by $250 billion of additional back-loaded cuts. Larger deficits early are offset by smaller deficits later and a more rapidly declining debt path. That's good for the recovery and good for long-term deficit reduction.
Both the Obama budget and the Democratic Senate budget are much less ambitious versions of Scenario 5, as I've discussed here and here. They have less up-front stimulus and less long-term deficit reduction. But they at least adhere to the principle of stabilizing the debt without adding further impediments to the recovery. The Republican House budget is another story altogether – it hurts the recovery and calls for unnecessarily radical cuts in popular and effective programs.
Chad Stone is chief economist at the Center on Budget and Policy Priorities.