Pethokoukis, Economics, U.S. Economy

CBO slashes deficit forecast. Is America’s Age of Debt pretty much over?

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Since the start of the Great Recession and financial crisis, the US government has been running annual budget deficits at a level unseen since World War Two.

But not anymore. According to a revised Congressional Budget Office forecast, the budget deficit will shrink this year to $642 billion. That’s the smallest shortfall since 2008. And at 4.0% of GDP,  the deficit this year will be less than half as large as the shortfall in 2009, which was 10.1%.

Moreover, CBO’s 2013 deficit estimate is about $200 billion below the one it produced in February thanks to higher-than-expected revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac. From 2015 through 2018, CBO sees annual budget deficits of just 2.4% of GDP, right at the 40-year average before the Great Recession.

Look at it this way: In 2009, spending was 25.2% of GDP and revenue 15.1% with a deficit of 10.1%. In 2015 when the deficit will be at its low point for the forecast, CBO projects spending at 21.4% of GDP and revenue at 19.3%. So of that eight percentage point swing, 4.2 points came from rising revenue, 3.8 points from falling spending (thank you sequestration).

So debt problem solved? Not according to this chart:

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We’ve merely managed to stabilize the problem at the historically high level of over 70% of GDP versus the 39% average of the previous four decades. Also, note that CBO projects government’s net interest spending will more than double as a share of GDP in the coming decade—from 1.4% in 2014 to 3.2% in 2023, a percentage that has been exceeded only once in the past 50 years.

And once we get past the the ten-year budget widow depicted in the charts, the deficits likely continue to widen as entitlement spending keeps increasing. Washington’s priority should be to reform entitlements and look for smart, pro-growth ways to reform taxes, immigration, education, and public investment. Growth, growth, growth!

7 thoughts on “CBO slashes deficit forecast. Is America’s Age of Debt pretty much over?

  1. There are many reasons for this payment volatility. One that I suspect that it all shows is how variable tax receipts are when you work off of a narrow base.

  2. How about capital gains taken in 2012 in order to avoid the 2013 cap gains hike from 15% last year to about 23% for the wealthy this year. Thats nearly an 8 point differential, plenty of incentive for some folks to pull the trigger early.

    That won’t happen again.

  3. The DJIA was at 13,104 on 12-31-12. Paying 15 percent capital gains on the ENTIRE index as a gain (impossible) would net $11,138. The DJIA was at 15215 on 5-13-13. At 23 percent capital gains on the ENTIRE index (impossible) the take home would be $11,715.
    One hopes that MacDaddy isn’t selling investment advice.

  4. Still a huge annual deficit when you consider government debt stands at $17T. On top of that there is significant waste and fraud and unnecessary spending. We need reform of entitlements and smarter government

  5. Pretty unbelievable. This rates a quick blog post and barely an admission from Mr. Pethoukoukis — Just months ago, the GOP was ranting about our nightmare deficits, but when it begins closing at a speed few could even anticipate, its swept under the rug because its Obama… Unbelievable.

  6. re: “And once we get past the the ten-year budget widow depicted in the charts”

    I wonder if you folks ever read the comments. As I pointed out before, the Federal Reserve published a study last year regarding the accuracy of CBO’s long range deficit forecasts over the last few decades, noting (where RW=”Random Walk”):
    http://research.stlouisfed.org/publications/review/12/01/21-40Kliesen.pdf
    “the CBO’s cumulative 5-year projections are considerably worse than projections from the RW model; [...]the deficit projections beyond a year were unreliable. Importantly, we found that the projections were biased in the direction of underprojecting the size of the deficit or overprojecting the size of the surplus.”

    In addition the CBO has an unrealistic baseline scenario which assumes current laws aren’t changed, even though for instance politicians want to remove the sequester. In addition some have observed that there may be increased revenue temporarily with people scheduling capital gains and other revenue recognition and taxes ahead of tax increases so the change may be misleading.

    Their current policy forecast is at least slightly more accurate, but it contains optimistic forecasts for GDP growth, rather than using more conservative ones for planning purposes which seems more appropriate. This page updates a GAO forecast using more conservative projections from other government agencies.

    http://www.politicsdebunked.com/article-list/budget-lottery

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