Hiatt: There Hasn't Been a Deficit Victory

In an op-ed in the Washington Post yesterday, editor Fred Hiatt pushed back on assertions by the Obama Administration that they have won over the deficit. Hiatt highlights a tweet by adviser John Podesta comparing fiscal metrics now and five years ago with the comment "a funny thing happened on the way to entitlement explosion" and a speech by President Obama at Northwestern University where he said "deficits have come down at almost a record pace, and they’re now manageable."

It is true that deficits have come down quickly, though context is needed. Without further legislative action, deficits are far from manageable, at least beyond the next few years. Although deficits have fallen significantly from post-World War II highs (as percent of GDP) and will remain below 3 percent of GDP through 2018, they will rise after that reaching 3.8 percent by 2022. Deficits will continue to increase beyond that as spending on interest and the major entitlement programs outpaces revenue. That, of course, leads to a run-up in debt.

Federal debt has reached 74 percent of the economy’s annual output (GDP), “a higher percentage than at any point in U.S. history except a brief period around World War II,” the CBO says, “and almost twice the percentage at the end of 2008.” With no change in policy, that percentage will hold steady or decline a bit for a couple of years and then start rising again, to a dangerous 78 percent by 2024 and an insupportable 106 percent by 2039.

Elevated debt will take its toll on the economy, and the rise in entitlement spending will make it harder to maintain other priorities over the long term.

Meanwhile, with the population aging and costs still rising, payments for Social Security and health programs including Medicare and Obamacare also will soar, the CBO estimates. By 2039 those programs will consume 14 percent of GDP, again double the average of the past 40 years. That’s taking into account the good news that Podesta heralded in his tweet.

Put those together and the government will be spending on entitlement programs and interest alone just about what it spends today on the entire budget. Everything else — schools, pre-K, Pell grants, national parks, mass transit, housing subsidies — will get squeezed, or taxes will soar, or both.

Deficits are coming down in the near term, largely as a result of stimulus and automatic stabilizers fading away and short-term deficit reduction. But structural deficits remain, and the deficit reduction enacted does not address the drivers of debt. While the good news may have bought a little time, demographic and health care trends must be addressed soon before they get out of control.