Has The Federal Budget Deficit Problem Been Solved?
DAVID GREENE, HOST:
Maybe you remember not so long ago there was this showdown over the federal budget - it provoked a government shutdown and a market rattling confrontation over the federal debt ceiling. Well, today the federal budget deficit seems to have faded, both as an economic issue and a political one. To find out what has changed, we turn, as we often do, to David Wessel, a senior fellow at the Brookings Institution and a contributor to The Wall Street Journal. David, good morning.
DAVID WESSEL: Good morning, David.
GREENE: So I think I know the answer to this question, but I'll ask it anyway. I mean, has a deficit problem somehow been solved here?
WESSEL: No. You're right, it hasn't been. But there is some good news. The economy's been getting better. Congress raised some taxes. It's restrained spending more than some people had expected. And all that has combined to reduce the deficit for the current fiscal year. This year, revenues are expected to be 8 percent ahead of last year, but spending only 2 percent ahead of last year. So yesterday the Congressional Budget Office predicted that this year's deficit for the fiscal year that ends at the end of September will come in at around $500 billion. Now, that's a lot of money, but it's $170 billion less than last year's deficit. And it works out to 2.9 percent of the gross domestic product. That's slightly below the average for the last 40 years, and it's a far cry from the nearly 10 percent of GDP deficits that we saw during worst of the recession.
GREENE: OK. Well, what I'm getting from all that math there is pretty good news. Is there a but we should know about?
WESSEL: There is a but. The problem is not today's budget deficit. The problem lies in the not-too-distant future. Look, the federal government borrowed a lot of money over the last several years, and it continues to borrow because it's spending more than it takes in. If you add up all the money the government has borrowed, the federal debt works out to be about 75 percent of the gross domestic product. That's twice what it was before the recession, higher than any time since 1950.
Now, CBO says, it'll level off at that historically high level for a few years and then start to climb again as spending - particularly in health care - climbs faster than taxes under current law. So why do we worry about that? Well, in part because it means the government will have less maneuvering room if it ever wants to borrow heavily again to fight a recession or fight a war or something else expensive. So the problem isn't urgent, but it's not solved.
GREENE: And part of the problem isn't the argument that many people have made that when you're borrowing a lot of money, you're also paying a whole lot of interest.
WESSEL: Exactly. This year CBO says that government will spend $230 billion - 7 percent of all federal spending - on interest. But interest rates are sure to rise over the next few years, and so by 2024 - 10 years from now - CBO says the interest tab will come close come to 800 billion, 14 percent of all federal spending, and that's money that won't be available for other things.
STEVE INSKEEP, HOST:
You say 2024, David. I mean, we know these 10-year forecasts can always be wrong. They're revised in all sorts of ways. I mean, hasn't a long-term outlook for the deficit been improving?
WESSEL: It has been improving, largely because of a slowdown in the pace in which government health care spending has increased and because Congress has held down some other spending. But the 10-year forecasts are beginning to stabilize and the most interesting thing to me is, is something that The New York Times pointed out yesterday.
A few years ago, CBO said Medicare would cost about $12,700 per beneficiary in 2019, five years from now. Today its best guess is 11 percent lower, $11,300, and with so many people on Medicare, that adds up to a lot of money. So - and also CBO now thinks interest rates in the future are going to be lower over the next decade than they previously forecasted. That also means smaller deficits than it had predicted.
INSKEEP: We're also not seeing this discussed as much in the political realm. And I wonder, is that a calculation that both parties have made, that this isn't a good issue for them? Are we going to hear about the budget deficit in this fall's midterm elections?
WESSEL: You know, it's kind of interesting. If you look at the polls, the public opinion polls, Americans still tell the pollsters that they worry a lot about the deficit. It usually racks right up there with jobs and the economy, though the angst is eased a bit from a few years ago. But from what I see in the campaign, the candidates seem to figure it's not a big issue. The folks who worry about the deficit still say there's worries; the folks who thought the deficit issue was overblown still think that. So it doesn't seem to be an issue.
Tax and spending is likely to return to the headlines when Congress returns on September 8 because the House and Senate have yet to agree on spending bills to keep the government operating. But they're unable to agree on the big issues, how much to tax, how much to spend. So they're simply going to put those off, as they often do.
INSKEEP: As they often do. Well, David, thanks as always.
WESSEL: You're welcome.
INSKEEP: David Wessel is the Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution and also a contributing correspondent to The Wall Street Journal.