CED Responds to New CBO Projections
As we have written before, the CBO recently released updated projections that show an improvement in the fiscal climate. Based on CRFB’s realistic baseline, the new data suggests that the debt will rise to 76 percent of GDP in 2023 as opposed to 79 percent. Some commentators have held up this rosier outlook as proof that the deficit reduction battle is over, at least for the next decade or so. This is a misreading of the CBO’s report, since as we pointed out the projections reflect largely short-term improvements that impact the debt level as opposed to its trajectory (although there were also encouraging downward revisions to health care and Social Security spending).
A recent blog by the Committee for Economic Development underscores the fact that the better numbers from CBO do not mean that our debt problem is solved. As we did, they point out that most of the improvement is transitory in nature:
Of the $203 billion improvement in the 2013 deficit, $95 billion comes from a unexpected payment to the Treasury from Fannie Mae and Freddie Mac. CBO reports that those payments will occur because of “accounting changes,” and assigns a probability of zero to any further payments at anything like that magnitude over the next 10 years. Another $105 billion (that is, essentially the remainder) of the improvement comes from higher revenues. Those revenues apparently arose because upper-income households shifted an unexpectedly large portion of their income from calendar year 2013 to calendar year 2012 to head off the increase in upper-bracket tax rates, and because corporate tax payments snapped back to normal from their depressed recession percentage of profits somewhat faster than CBO had anticipated in February.
CED’s blog notes that "CBO now expects the deficit to improve through only 2015, and then to begin to rise again. And by 2019, the deficit is again large enough that the public debt grows faster than the economy – that is, the debt-to-GDP ratio begins to rise again." Instead of declaring victory, policymakers should be focused on putting the debt on a sustainable downward path over the long term as a percentage of GDP.
The blog also points out that while projections are uncertain, there is not necessarily a strong reason to believe that they will improve on their own.
Still, admitting uncertainty, it is hard to see a lot of upside in these numbers. Might there be still more revenues? Sure – but CBO already has raised its projection of revenues as a percent of GDP above their long-term average. And that is after the income tax rate cuts for the vast majority of the population were made permanent at the beginning of this year, making further revenue improvement less likely. And outlays could be lower, too; but CBO (as noted above) already has reduced its estimates for Medicare, Medicaid and Social Security.
While this honest assessment of the CBO’s projections may seem bleak, it is by no means a riddle without a solution. Our analysis has estimated that under the new projections, $2.2 trillion in additional deficit reduction would put our debt on a sustainable downward trajectory by 2023. There are numerous ways to get there -- for instance, Erskine Bowles and Alan Simpson’s new plan would save $2.5 trillion -- but the political will to do it will be needed.