The troubling fiscal outlook
Although the budget deficit is lower than expected, public debt will continue to increase.
WHEN IS an improving fiscal situation not really an improving fiscal situation? When it’s the United States’ current one. That’s the lesson of the White House’s annual budget update, known as the-Mid-Session Review, which was published Tuesday by the Office of Management and Budget (OMB). Data in the report show the federal government is on course to record a $455 billion budget deficit this year, which is $128 billion less than the Obama administration had projected six months ago. Expressed as a percentage of gross domestic product, this is even more impressive: it amounts to six-tenths of a percent of GDP that we were planning to borrow this year, but won’t have to borrow after all. Well over half of this unexpected deficit reduction is due to above-forecast tax revenue, generated by the economy’s continued growth. Given the report’s forecasts for next year, it is likely that, as a share of the economy, the budget deficit at the end of the Obama presidency will be three-quarters smaller than it was at the beginning. Not too shabby.
Here’s the problem: This year’s progress is likely to get canceled out later on. The same White House report projects no real improvement in the longterm fiscal outlook, and indeed foresees a slight deterioration. In February, the OMB forecast that the public debt— the stock of accumulated annual deficits — would drift down from 75.3 percent of GDP this year to 73 percent by 2025. Now, however, the OMB sees public debt stuck at 74.6 percent in 2025. Though sustainable in the short run, no one can say for sure how long that level of debt will remain affordable; it is well above historical norms for the U.S. economy. It leaves the United States a narrower “fiscal space” to help cope with another recession, war or other emergency. And it represents the uncomfortably high base from which debt is expected to rise even more in the years after 2025, according to the Congressional Budget Office and other experts.
These stubbornly high levels of public debt, and the prospect of truly uncontrolled debt in the years beyond 2025, reflect the lack of fundamental reform to U.S. entitlement programs such as Medicare and Social Security. President Obama may be able to boast about lower deficits on his watch, but not his avoidance of this issue.
That much is, alas, familiar; but the White House report adds sluggish economic growth to the list of reasons for the troubling long-term picture. Specifically, the OMB now expects the U.S. economy to expand only 2 percent this year, as opposed to the 3 percent it forecast at the beginning of 2015. That lower forecast, in turn, caused forecasters to downgrade growth expectations slightly for the rest of Mr. Obama’s second term; the annual rate will probably not reach 3 percent in that time.
The candidates to succeed Mr. Obama have been touting their economic growth plans as formulas for full employment and higher wages. The latest data remind them, and us, that growth is crucial to fiscal stability, too.