Questions
626-991-4712

Email

Live Broadcast
11:00 - 12::00
Friday

 

 

 

 

 

 

 

 

 

 

 

 

Deficit Cuts Aren’t Going To Happen

STEPHEN MOORE
IBD: Sep 2, 2014; Section: Issues & Insights; Page: A19

President Obama has been celebrating the decline in the budget deficit over the last several years — from $1.3 trillion in 2010 to the still stratospheric $500 billion this year. Somehow borrowing more than $1 billion a day is seen as a fiscal triumph in Washington. Talk about dumbing down the test.

In any case, the “progress” isn’t likely to last.

On Wednesday, the Congressional Budget Office delivered its summer fiscal snapshot and it wasn’t pretty. Deficits will linger in the half-trillion dollar range for the next several years. Then, starting in 2018, they’ll head north again and climb relentlessly every year back to near $1 trillion by 2024. The borrowing blitz won’t end for decades, according to CBO.

The debt as a share of national output is expected to rise to 77% of GDP in 2024, up from 72% last year. But one amazing feature of this decade-long forecast flashes caution.

There is no recession assumed for the next decade. Implausibly, this would be the longest economic recovery in history if that were the case.

The national media tended to focus on the slight improvement in the ten-year budget forecast, which estimates about $400 billion less expected borrowing through 2024. But that isn’t driven by some sudden alarm going off in the White House and in Congress that something better be done to change our fiscal direction.

No, it was mostly due to CBO’s forecast of lower interest rates. Of course, if already historic low rates start to rise, all bets are off on the deficit. No institution in the world is more vulnerable to an interest rate spike than Uncle Sam because of the $17 trillion debt that already must be serviced.

But even with low interest rates, the deficit will remain high for a very long time. The problem isn’t tax revenues — they are expected to grow every year and stay steady at the historical rate of just over 18% GDP.

Discretionary spending on national defense and domestic programs has been falling rapidly over the last three years and remains well below 2010 levels. They are expected to continue to fall, thanks to stiff budget caps and sequester penalties for exceeding those caps.

Winning those spending controls from Obama back in 2011 may have been John Boehner’s greatest accomplishment as speaker. Spending on defense keeps falling and, given the events around the world, there are serious national-security doubts about these deep cuts.

The real spending problem is that, over the next decade, outlays will explode by nearly $2.3 trillion. Of that increase, 60% will go to income redistribution programs — or what Washington euphemistically calls “entitlements.” Another 25% will be interest on the debt. The remaining pittance will be for defense and domestic agencies. National security spending has fallen from nearly 50% of the budget under John F. Kennedy to just 17% — and falling — now.

The nation has been on high alert for at least two decades that the baby-boomer retirement wave was coming and that this demographic hurricane would rip gaping holes in the budget.

Nothing was done. Now 10,000 boomers are retiring every day. This means costs for the big four budget boulders — Social Security, Medicare, and Medicaid, plus ObamaCare subsidies — will soar. From 2013-2024, nominal spending on these programs will surge 95%.

It’s not well known that the health care law’s main way to expand health coverage is by adding millions to Medicaid rolls. Already, 3 million more Americans have come aboard, and that number could double in the next several years. The CBO finds that by the end of the decade, ObamaCare means more than $100 billion added subsidy costs every year — and counting.

But who pays for this? Columnist George Will quips that when he retires, “I will stop sending my health care expenses to my insurance company and start sending them to my kids.”


 

Whether millennials will pay these costs or whether some kind of generational warfare looms is an open question. Budget expert Peter Ferrara notes that “the numbers are very ugly. This fiscal time bomb has been ticking for years and the only question is when it detonates.”

What would surely capsize our fiscal ship is if interest rates rise faster than expected. A 200 basis point bump in borrowing rates would add more than $3.42 trillion to the 10-year deficit forecast. And if a recession hits, all bets are off.

A burst of growth at 4% or higher would ease these pressures, but what will trigger that boom in an era of high tax rates, hyperactive regulatory assaults on vital industries like energy and financial services, and so on?

That the CBO numbers were met with yawns and even some smug self-congratulation in Washington only emphasizes how dire the situation is. We seem to have become anesthetized to the news of ruinous borrowing.

The late economist Herb Stein used to say of Washington: “if a trend is unsustainable it will eventually stop.” The binge spenders in Congress seem to be crossing their fingers and praying that these policies miraculously don’t cause a crash landing — or at least that they won’t be around when it happens.

Moore is chief economist at the Heritage Foundation and a member of the IBD Brain Trust.