Deficit Shrinks, but We're Not Out of the Woods
For a change, there is actually some good news in fiscal policy. Late last week, the Department of Treasury reported that the budget deficit in 2015 fell to $439 billion. That's about a 10 percent drop from last year, and a whopping 70 percent fall from the 2009 peak of $1.4 trillion.
But let's not pop open the champagne just yet.
A 70 percent slide in deficits is certainly significant, but when put in context, it is less impressive than you'd think. The rapid fall was from record-high levels and followed a humongous 779 percent increase between 2007 and 2009. It also seems the era of deficit decline is almost over, with trillion-dollar deficits projected to return within a decade and possibly much sooner.
Annual Deficits, 2002-2025
Even today, our national debt — the total amount we owe as a country — remains at record-high levels. Back in 2007, our national debt held by the public was $5 trillion — or 35 percent of Gross Domestic Product (GDP). Today our debt is over $13 trillion, or 74 percent of GDP. The debt has never been that high in dollar terms, and has reached that level as a share of GDP only in the period around World War II.
If that weren't troubling enough, both deficits and debt are projected to rise. The recent reduction in deficits — largely the result of the economic recovery and to a lesser extent the limits on discretionary spending — is not projected to last. As interest rates rise, the population ages, and health costs grow, we can expect to spend much more on Social Security, Medicare, Medicaid, and interest on the debt. Put simply, revenue isn't keeping up.
According to official current-law projections, debt will grow to $21 trillion, or 77 percent of GDP, by 2025; and we at the Committee for a Responsible Federal Budget estimate debt will reach about $52 trillion and eclipse 100 percent of GDP by 2040. Under alternative projections that assume Congress will fail to pay for the continuation of various tax and spending policies — as is quite possible — debt will reach 85 percent of GDP ($23 trillion) by 2025 and surpass the size of the economy as soon as 2031.
And yet there seems to be more interest in offering new tax cuts and spending programs, which threaten to balloon the deficit, than in solving this problem. We've seen this on the campaign trail, but also in Washington.
It almost seems as if the $439 billion deficit this year is being used as an excuse to add to our already oversized debt. Given the many fiscal challenges on the horizon, that would be a huge mistake.
Instead, lawmakers should take advantage of falling near-term deficits to focus on the nation's real fiscal challenge: the long-term trajectory of the debt. Thoughtful, gradual, well-targeted, and pro-growth tax and entitlement reforms enacted today could first prevent debt from growing faster than the economy and then slowly but surely reduce the debt toward historical levels.
In order to do that, we first must admit there is still a problem.
Marc Goldwein is the senior vice president of the Committee for a Responsible Federal Budget, a nonpartisan organization committed to educating the public about issues that have significant fiscal-policy impact. For more analysis of the FY 2015 deficit, click here for CRFB's paper.