The trou­bling fis­cal out­look

Although the bud­get deficit is lower than ex­pected, public debt will con­tinue to in­crease.

The Washington Post Sunday - - OPINION SUNDAY -

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.

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