David Frum

04.22.13

The Deficit is Under Control

AEI's John Makin studies the numbers and concludes that the United States has already achieved a sustainable fiscal path for the medium term. There's no need for further near-term spending cuts. Instead, Congress should go to work on longer-term tax and entitlement reform. Here's a quote with permission from an advance copy, the text will be available on the AEI site tomorrow.

The United States has actually made substantial progress toward deficit reduction in 2013 ...

On January 2, as part of an agreement to avert the sharpest austerity that would have been triggered by the “fiscal cliff,” Congress did pass a total of about $180 billion of annual tax increases. The result is that, by the 2014 fiscal year, the fully phased-in sequester, along with the January 2013 tax increases, will cut the US deficit—already on a downward path—from $1,089 billion in 2012 to $845 billion in 2013, and then further to $615 billion in 2014. In terms of the deficit-to-GDP ratio, that is 7 percent in 2012, down to 5 percent in 2013, and down further to 3.7 percent in 2014.

That is substantial progress, especially when compared with the G7 average ratio of deficits-to-GDP projected to be −4.0 for 2014.

The years 2015–17 look even better, with Congressional Budget Office (CBO)–projected deficits averaging just 2.5 percent of GDP, very close to the 30-year average of 3.4 percent and well below the projected G10 average of 3.5 percent. The US debt-to-GDP ratio stabilizes at about 75 percent on a slight negative trajectory from 77 percent in 2014 down to 73.1 percent in 2018. The United States is well below the much-feared 90 percent [Reinhart & Rogoff] threshold, which itself has been called seriously into question.

The American fiscal austerity has been moderate and probably, at the current pace of deficit reduction of about $300 billion per year over the next half decade, has proceeded far enough for now. … [I] is important for the US Congress to take yes for an answer to the question of whether it has already achieved substantial deficit reduction. Perhaps by accident, Congress has in fact reduced the US budget deficit by enough to enable working at long-term fiscal reform,