Washington’s habit of spending money it doesn’t have has been a defining political issue for the last several years. Now it’s beginning to appear that ongoing political drama over costly stimulus programs, debt-ceiling duels and punishing austerity measures has been overwrought -- if not completely unnecessary.
The Congressional Budget Office, which publishes some of the most-trusted estimates of the government’s future finances, has now lowered its estimate of the federal deficit for 2013, while also offering an improved outlook for the next few years. The CBO says the government’s 2013 deficit will total $642 billion, which is $200 billion lower than its forecast just three months ago. Deficits should continue to shrink for the next two years, CBO predicts.
Under the CBO’s new estimate, the 2013 deficit would amount to just 4% of GDP. That’s high by historical standards, but it would be the lowest deficit by far during President Obama’s five years in office and considerably lower than the 2009 deficit, which, at 10.1% of GDP, was the largest since World War II. The CBO thinks deficits will continue to narrow as federal tax revenue exceeds expectations, recent spending cuts lower federal spending and the bailed-out mortgage agencies Fannie Mae and Freddie Mac return to profitability ahead of schedule.
That’s all good news, but anybody who has paid attention to the budget battles in Washington during the last five years can legitimately ask: Really? After five years of political warfare over debt and deficits, it all turns out to be no big deal?
Concern over Washington’s mushrooming debt load has directly affected the U.S. economy since at least 2009. That’s the year Congress passed an $840 billion stimulus plan that reduced the severity of the Great Recession, but didn’t go far enough to trigger a robust recovery. Obama and some economists called for additional stimulus measures, but concerns about the government taking on too much debt got in the way.
The same worries led to the debt-ceiling showdown in the summer of 2011, when Congressional Republicans refused to extend the government’s borrowing limit until Democrats agreed to consider major debt-reduction measures. That political standoff unnerved investors everywhere, sent stocks reeling and led to the first-ever downgrade in the U.S. credit rating.
The last-second deal to avert an outright default on U.S. government debt in 2011 led to the “fiscal cliff” and the “sequester” this year, measures that, combined, will probably slice at least half a percentage point off GDP growth in 2013. Most economists recognize the need to deal with Washington’s excessive debt at some point, but many believe that instead of now, it would better to wait until the economy is stronger and unemployment is lower.
Most of the recent budget battles in Washington have been predicated on the idea that a debt crisis might be right around the corner. When the “bond vigilantes” strike, the theory goes, interest rates will skyrocket, investors will shun U.S. government debt and Washington will suddenly have no choice but to hike taxes and slash spending.
That has, in fact, happened in places like Greece. But in the United States, interest rates have remained close to record lows and the economy has shrugged off concerns about Washington’s mountain of debt. And it now appears policymakers could have done more to help the economy by extending temporary tax cuts or putting off the recent spending cuts. At a minimum, the politicians didn’t need to fight so viciously over budget issues and hold the economy hostage to their whims.
The CBO does point out that beginning around 2018, deficits are likely to rise once again to unsustainable levels -- and if nothing changes, go up and up and up. That’s largely because of mounting health care costs as the baby boomers retire and tap into Medicare. So the national debt -- the sum total of all deficits -- will in fact swamp the economy if policymakers don’t deal with the problem.
But CBO’s new numbers make it clear that lawmakers still have plenty of time to craft a long-term debt-reduction plan that goes into effect gradually, without shocking the economy. Don’t hold your breath waiting for them to do it.