Bombshell CBO Report Says Deficit Shrinking
On Tuesday, Washington was consumed with a series of scandals, nonscandals, and tail-eating—Benghazi, the Internal Revenue Service, the AP. So much so that the biggest policy and political story of the day was largely ignored. You could search in vain on Politico’s front page for articles about the Congressional Budget Office’s bombshell report that the fiscal 2013 deficit would come in at $642 billion—$200 billion smaller than its February estimate, and down a stunning $447 billion, or 41 percent, from last year.
For much of the past two years, deficits, debts, revenues, and spending were all elite Washington (and New York) wanted to talk about. Endless pixels were spilled on the maneuverings surrounding the debt-limit negotiations, the various commissions and efforts to forge a grand bargain, the approach of the fiscal cliff, and the brutal logic of the sequester. Because debt, budget, and spending issues were one of the few cudgels Republicans could wield against Obama, attention was paid 24-7. But the interest was always more in process and politics than policy: Who would be the vital dealmaker? Would we have a grand bargain to raise some taxes and rein in the growth of Medicare and Social Security? Could the establishment save America from becoming the next Greece?
As we’ve been noting, a funny thing has happened on the way to America’s becoming the next Greece. Even as Washington failed—again, and again, and again—to strike a grand bargain or engage in rational policymaking, there has been immense, unprecedented progress in reducing the short-term deficit. It turns out the miracle cures for deficits aren’t grand bargains. Rather, the cures are sustained growth and a willingness to tax income and investments at higher rates. And the miracle cure for reducing the growth rate of entitlements may well be the unipartisan Affordable Care Act, not some bipartisan commission.
I’ve dubbed this the Golden Age of Deficit Reduction. Through the first seven months of fiscal 2012, which started last October, revenues are up 16 percent from the year before, while spending is off about two percent. Several factors are at work. More people are working, at slightly higher wages, and are paying higher payroll taxes. Rich people, who took huge capital gains and dividend payments in late 2012 in anticipation of higher taxes, were forced to pay taxes on that income in the first few months of 2013. Spending is falling, thanks in part to the sequester, and thanks in part to lower spending on defense and unemployment benefits. And so in the first seven months of the fiscal year, the deficit came in at $489 billion, off about 31 percent from the first seven months of fiscal 2012. As of last week, it was looking like the deficit for the full fiscal year might come in at about $800 billion. That would represent fantastic progress.
But wait, said the CBO on Tuesday. There’s more! Fannie Mae and Freddie Mac, the government-owned mortgage agencies, have been minting money and turning it over to Treasury. Tax revenues are continuing to rise, and spending is muted. So when CBO updated projections for this fiscal year and the next 10 fiscal years on Tuesday, it said the fiscal 2013 deficit would come in at $642 billion—or about 4 percent of GDP. That’s astonishing, especially given that in fiscal 2009 the deficit was $1.4 trillion, or more than 10 percent of GDP. Like I said, this is the Golden Age of Deficit Reduction.
But there’s even more. Under current policy—i.e., absent some new grand bargain on taxes and spending—CBO said the annual deficit, measured as a percentage of GDP, would decline in the next two years, checking in at a low 2.1 percent of GDP in 2015.
Now, these numbers are notoriously volatile and could move in either direction quite easily. And deficit scolds tend to pooh-pooh short-term progress by pointing at the long-term issues that remain—especially the growth rate of entitlements like Social Security and Medicare. But there’s been substantial progress here, too. As The New York Times reported last week, there’s an emerging consensus that the growth rate of spending on health care has fallen in the past few years. “Between 2009 and 2011, total health spending grew at the lowest annual pace in the last five decades, at just 3.9 percent a year,” the Times reported. That’s about half the rate seen in the period from 2000 to 2007. Sure, in pinched economic times, people are spending less on health care. But, as Jonathan Chait of New York argues, Obamacare deserves some credit. The Affordable Care Act has scared providers and other industry participants into clamping down on costs and becoming more efficient. And as Republicans remind us ad nauseam, Obamacare takes hundreds of billions of dollars out of future Medicare spending.
Whatever the reason, in the absence of a grand bargain, it seems like the U.S. will be spending less than expected in the future on health care. In its report Tuesday, CBO scaled back its projections for deficits over the next decade. Why? “For the 2014–2023 period, CBO now projects a cumulative deficit that is $618 billion less than it projected in February,” the reported noted. “That reduction results mostly from lower projections of spending for Social Security, Medicare, Medicaid, and interest on the public debt.”
The press prefers covering dysfunction and controversy to covering policy. For much of the last two years, fiscal issues were dangerous, all-consuming controversies. The inability of Washington to create a rational budget deal was an obvious sign of dysfunction. But with the fiscal cliff behind us, the Republicans reluctant to play chicken with the debt limit, and the deficit melting away, fiscal issues aren’t nearly as controversial.
That doesn’t mean the numbers should be ignored. If a grand bargain had been achieved, and CBO was reporting these sharply lower numbers on short-term and long-term deficits, Erskine Bowles and Alan Simpson would be the grand marshals of a ticker-tape parade down Pennsylvania Avenue. The irony is that we have achieved a good chunk of the professed goals of the professional deficit hawks and the Republicans—just without their active participation.