Perhaps you’ve heard President Obama’s talking point that the federal budget deficit has fallen by two-thirds on his watch. That overlooks that the deficit first soared on his watch, and then fell thanks largely to the GOP House and modest economic recovery, and that as he leaves office he is going to need one more asterisk: The deficit in 2016 has begun to rise again, in dollars and as a share of the economy. And after he leaves office, it takes off.
That was the news Monday in the Congressional Budget Office’s largely ignored annual budget and economic outlook. CBO’s gnomes estimate that the annual federal deficit will increase this year after six years of decline — to $544 billion from $439 billion in 2015. It will also rise as a share of the economy to 2.9 percent from 2.5 percent.
This deficit increase by itself shouldn’t cause great alarm, but the reasons to care are the explanation and the trend. The deficit is rising again largely because spending is climbing rapidly again, an estimated 6 percent this year, or triple the rate of inflation. As a share of GDP spending will climb by 0.5- percentage points to 21.2 percent.
December’s budget deal explains the $32 billion increase in 2016 in discretionary spending (the kind Congress approves each year). Defense spending will “edge up slightly,” CBO says, while domestic discretionary climbs by 4 percent. That leaves the big money to the usual suspects — entitlements. Outlays for Medicare (net of premiums), Medicaid, the children’s health insurance program and ObamaCare subsidies will increase no less than 11 percent, or $104 billion, this year.
Even an estimated federal revenue increase of 4 percent for the year can’t keep pace with this kind of spending blowout. Receipts will rise to 18.3 percent of the economy, which is well above the average of 17.4 percent from 1966 through 2015. So even as revenues return to their historical norm, they can’t compensate for the spending on entitlements that Mr. Obama has refused to reform.
Now for the bad news. CBO estimates that deficits will continue to rise each year after Mr. Obama leaves office. “As a percentage of GDP, the deficit remains at roughly 2.9 percent through 2018, starts to rise, and reaches 4.9 percent by the end of the 10-year projection,” says the budget office. This assumes that the economy grows by 2.7 percent this year and 2.5 percent next year before levelling off to an average of 2 percent, which also assumes there is no recession even though this expansion is already long in the tooth into its seventh year.
As ever, the big spending drivers will be entitlements, which are projected to rise to 15 percent of the economy from the current 13.1 percent over 10 years. This is the fiscal time bomb that Mr. Obama will leave his successor, thank you very much.
By the way, all of this is the optimist’s tale. The CBO estimates assume that discretionary spending will fall over the same period to 5.2 percent of the economy from 6.5 percent. This will never happen because it means defense spending would have to shrink well below 3 percent of GDP, a form of gradual unilateral disarmament. So without entitlement reform or faster economic growth, the deficits are likely to be much higher.
The federal debt held by the public — the kind we have to pay back — has already climbed to 73.6 percent of GDP (from 39.3 percent in 2008) on Mr. Obama’s watch and will increase to 75.6 percent this year. CBO expects it will keep climbing to 86 percent in 2026.
We realize such unhappy realities are not supposed to intrude on a presidential campaign, and the American public long ago dropped spending and deficits as major concerns. Voters care more about the economy and terrorism, and there’s good sense to that. The deficit will never vanish without faster economic growth, and the various tax reform plans that Republicans are offering would spur growth. By all means let’s debate growth.
On the other hand, any candidate who tells you that the country can keep spending as it is without a day of reckoning probably believes Mr. Obama’s spin about his fiscal record.
— The Wall Street Journal,
Jan. 25
