Cue the confetti, budget woes are a thing of the past.
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That’s at least what some observers would have the public believe. Not because the budget is in balance. Not because the deficit isn’t running in the hundreds of billions. And not because the debt won’t continue to grow by the trillions.
No, today’s cheering is because the debt, measured as a share of the economy, will temporarily stop growing, dip, and then head north again.
This would be a true cause for celebration if the following were true: the debt weren’t already at historic levels and poised to grow, the drivers of the debt have been addressed, and the nation is guaranteed to grow at an average of 2.5% in real terms for the next 10 years.
None of these are true.
Debt in the hands of the public stands at 72% as a share of the economy. While this will trend down, assuming stable growth, average debt to GDP over the next 4 years is still projected to be the 5th highest 4-year average in the post-war period. High levels of debt, even if relatively stable as a share of the economy, leave the nation vulnerable to economic and geopolitical threats.
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Before the last recession debt held by the public was 35%. It has since more than doubled. Squabbles in the economic literature aside, seeing the national debt double again would undoubtedly harm growth. And besides, despite a brief respite, debt as a share of the economy is still projected to start growing again by 2018 and reach 79% by 2024.
The primary causes for our growing debts have been largely untouched by recent deficit reduction efforts. Discretionary spending, reduced by Budget Control Act, and tax revenue, recently hiked, are not driving debt. Mandatory spending and interest payments are.
Mandatory spending has been growing as the nation ages, health-care costs grow, and policy-makers create new entitlements and expand old ones. In 1974, mandatory spending was 41% of the budget, by 2024 it will be 62%. Meanwhile, interest payment on the debt will continue to crowd out the budget as the debt portfolio remains outsized, and interest rates catch up to a growing economy.
Underpinning all of the cheerleading – debt as a share of the economy – is the presumption that the economy will grow in the nice orderly fashion that CBO projects. CBO would likely be the first naysayers to this view. Since the beginning of the 20th century, the U.S. experienced 22 recessions, averaging two per decade. The cheerleaders assume the U.S. will be spared the lessons of history.
These realities shouldn’t cow the cheerleaders into silence, but into focus. Rather than give policy-makers a free pass for the next couple of years, which is all the cheerleading will really accomplish, observers should promote the structural changes to mandatory spending programs that are needed. Properly executed, these will take time to accrue into real savings, but should come into force right when the debt is set to take off.
A key feature of recent budget projections has been a slowing in health-care-cost growth. (This one is no different.) These are welcome phenomena, but they shouldn’t be relied upon. The 1990’s, for example, saw four years of slowing projected cost growth, which then evaporated. These projections certainly should not be relied upon in lieu of good policy.
Other policy changes, such as fundamental tax reform, should also be pursued to buttress growth in the future.
Celebrating the temporary respite – and a contrived one at that – from the growing debt belies a number of problems. But the most important one is the signal that the U.S. fiscal situation is stable. To be sure, Washington seems to have lost its appetite of late for dealing with the debt. The absolute last thing that serious policy observers should do is encourage this apathy.
Gordon Gray is the Director of Fiscal Policy at the American Action Forum.