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:
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!