August 29, 2014

CBO Projections for the Fall (Season)

The latest look at the federal debt and its effect on the economy.

For most of America, the Labor Day weekend is the symbolic end of summer. For the federal government, it means one more month until the end of the fiscal year, which closes Sept. 30. While we soak up the last long weekend of vacation with our families, Washington politicians are preparing for the final weeks before the midterm election season, and economic analysts are crunching numbers to see just where Washington stands in terms of fiscal projections, fiscal reality, and just what it might take to bring the two worlds closer to parity.

The news isn’t good and, unfortunately, it won’t get better soon. According to the Congressional Budget Office (CBO), the U.S. economy has grown by only 1.5% this past fiscal year, which is much lower than the Obama administration’s rosy 2.6% estimate. On the bright side, the CBO predicts an economic rebound of 3.4% over the next two years based on an uptick of goods and services, new business ventures and new housing starts. Unless, of course, there’s another season of bad weather – the scapegoat for 2014’s low numbers. Al Gore, please call your office.

Weather aside, America’s fiscal house is not in order, and our debt has put us on a dangerous track. Yes, the $506 billion budget deficit for 2014 was $170 billion less than last year, and the CBO predicts next year’s might get as low as $459 billion, so we’re supposedly heading in the right direction. Yet the annual budget deficit still isn’t close to pre-recession levels. Trimming it down means far less after Democrats quadrupled it. And it’s still far too large a percentage of GDP. In fact, this year’s “low” budget deficit numbers could be just a blip on the economic radar.

CBO projections for the next decade assume a sharp rise in deficit numbers, reaching $960 billion by 2024 unless Congress makes concrete changes to the principal drivers of our debt – Social Security, health care spending (ObamaCare, anyone?) and interest on the $17.6 trillion debt itself.

Congress has had many chances to make fixes, though our elected representatives have chosen to avoid even half-hearted action. Democrats insist that cutting defense spending – which is down 5% – and levying heavier taxes on the country’s most profitable companies and entrepreneurs is the answer. It’s not. Even if domestic and discretionary spending were cut to zero, the remaining revenue the federal government collects still wouldn’t reach balance.

Entitlements of one sort or another already account for a larger slice of GDP than we’ve seen since World War II. That slice will only grow over the next decade, accounting for $7.2 billion in unfunded liabilities by 2024, assuming a 5.6% unemployment rate after 2018.

The latest news from the CBO about lower budget deficits in the near term offers little reason to rejoice. The CBO maintains that the annual deficit for fiscal 2014 is lower than its earlier projections, and that it will fall to pre-recession levels, though those deficits weren’t worth celebrating, either. During Obama’s first four years in office, deficits averaged more than $1 trillion. At what point does anyone in Washington get serious about this? America’s credit rating is lower and our economic power overseas is weaker than it’s been since WWII. Yet no one wants to address Social Security, Medicare or Medicaid for their own political self-preservation.

There have been numerous opportunities to address America’s unfunded liabilities in the entitlement sector over the years. Politicians always end up putting it off to another day. Well, that day is upon us. These entitlements, and the debt as a whole, currently account for 74% of GDP. That’s not going to improve without major changes. Who has the courage to do something about it?

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