The good news is that according to CBO’s new budget update, the budget deficit is coming down fast and under their assumptions, will bottom out at 2.1% of GDP in 2015. The debt/GDP ratio begins falling in 2014, from about 76% to 71% in 2018. Just relative to their February projection, CBO’s taking down their 10-year deficit projection by over $600 billion.
And yes, that’s also the bad news. The damn thing is coming down too fast given the still weak economy. Moreover, both deficits and debt start to grow again later (see figure below). So the deficit is falling quickly when it shouldn’t be and rising later when it shouldn’t be.
Certainly, if facts drove the day, this update would be a fire hose for the hair-on-fire austerity crowd re the near-term deficit. The patient is checking out of the hospital while Drs Cantor, Ryan, and McConnell are still preparing for major surgery.
What’s driving these trends? Near term, it’s revenues up, outlays down…which is what you’d expect as the recession recedes in the rearview mirror (an infusion in payments from Fannie and Freddie also helped). Also, and this is important: relative to their February projection, the budget office has shaved $85 billion off of Medicare’s expected growth, 2014-23, of which only $10bn is sequester, and $77bn off of Medicaid. And, of course, there’s been about $2.7 trillion in deficit savings legislated so far, mostly (70%) through spending cuts.
Longer term, even with the recent improvement in the pace of health care costs, we still face pressure from the intersection of our aging demographics and health care spending. To bend those curves at the end of the figure, we’ll need to keep up the pressure on health costs as well as boost our revenues. Cuts alone won’t do it.
It would be nice if policy makers looked at the figure below and recognized that we need less austerity now and more health savings/revs later. But that would mean spraying water on their flaming heads, and that can be kind of uncomfortable.