Reality Check: The Proposed Freeze Is Peanuts

The Congressional Budget Office, without intending it, delivered a dismissive commentary on the administration’s expected proposal to freeze some “discretionary spending”—reportedly amounting to about a sixth of the federal budget—for three years. The move, if enacted, would reportedly save $250 billion over a decade. But it turns out that this would be mostly a rounding error in the decade’s projected deficits, which the CBO put at $6 trillion in a report released today. Even that figure is wildly optimistic because it’s based on assumptions (required by law) that are highly optimistic. For example, it assumes that all President Bush’s tax cuts of 2001 and 2003 expire after 2010 and that other tax breaks favored by the Obama administration aren’t extended. Dispensing with these assumed tax changes (the Obama administration has favored only slight modifications in the Bush tax cuts) would increase the 10-year deficit by about another $6 trillion or so.

The gigantic numbers remind us why no one—Democrat or Republican—has been eager to take on the deficit issue. By any honest accounting, large reductions in projected deficits would require both sizable spending cuts and tax increases from current policy. At a press conference, CBO director Douglas Elmendorf said the White House and Congress face a double challenge: to bring down the long-term deficits—which he called “unsustainable”—but not so quickly that the present economic recovery is sabotaged. Assuming that doesn’t happen, the CBO still predicts high joblessness lasting three or four years. The unemployment rate is projected at 10.1 percent this year, 9.5 percent in 2011 and 8 percent in 2012. By 2014, it gets to 5.3 percent.

In 2009, the budget deficit was $1.4 trillion, or 9.9 percent of the economy (gross domestic product), the highest in dollars and as a percent of GDP since World War II. The CBO says the deficit will be virtually the same this year—$1.35 trillion or 9.2 percent of GDP. The high deficit for 2010 reflects the slump’s devastating impact on the federal tax intake, plus continuing high spending for unemployment, food stamps as well as one-time spending under Obama’s stimulus. As the recession’s impact wanes, deficits do decline but an aging population—which raises spending on Social Security and Medicare—keeps them high. Even with the unrealistic assumptions about taxes, the smallest deficit under the CBO projections is $475 billion, 2.7 percent of GDP, in 2014. After that, deficits rise steadily. 

There are no easy fixes. In a series of hypothetical projections, CBO plays “what if.” Suppose the economy grows faster than the CBO estimates—say 0.5 percentage points faster every year (that would be a huge gain, because the CBO projects about 3 percent average annual growth from 2011 to 2020). Still, the faster growth would reduce the 10-year deficits by only about $1.4 trillion. How about a rapid withdrawal of U.S. troops from Afghanistan (under this projection, the number of troops there and in Iraq drops to 30,000 by 2013)? That would cut the 10-year deficit by about $1.2 trillion. As Elmendorf repeatedly said at his press briefing: there’s a huge gap between what Americans want in government services and what they’re willing to pay for in taxes.