December 17, 2014

Borrowing Good News on the Deficit?

Bloomberg and AP reported this week that the Obama Administration’s latest budget outlook, scheduled for release next Tuesday (same day as CBO’s summer update–watching the PR and press that day will be interesting), will show that they expect the fiscal year 2009 budget deficit to come in $262 billion lower than they predicted in May–at “only” $1.58 trillion, or 11.2 percent of GDP. Cause for celebration? Well, only if you don’t mind “premature celebration.”

Both articles point out that a $1.6 trillion deficit is not really qualitatively different from a $1.8 trillion deficit (both are “humongous”). From the Bloomberg article (by Brian Faler and Roger Runningen):

The deficit figure, as revised, would amount to 11.2 percent of the nation’s economy, the official said. That would be the biggest share since 1945.

“It’s better than we expected but it’s still a huge deficit,” said Stan Collender, a former congressional budget aide who is a partner at Qorvis Communications in Washington.

And from the AP story (By Jim Kuhnhenn and Philip Elliott):

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition. “I hope no one tries to spin that as good news.”…

“The deficit is obviously very large and a problem,” said economist Mark Zandi of Moody’s Economy.com. “But it’s not quite as bad as what expectations were a few months ago.”

Both articles correctly point out that most of the lower-than-expected deficit is due to a contingency for $250 billion worth of additional financial rescue that had been penciled in by the Administration but was never pursued–not this year at least. In their update, the Administration will reveal that total FY2009 federal spending will turn out to be $345 billion less than they had predicted in May ($3.653 trillion vs. $3.998 trillion). All of the reasons I’ve seen cited for this lower spending have to do with lower-than-expected short-term countercyclical spending–spending on rescues, bailouts, and stimulus–not lower-than-expected spending on our longer-term (ongoing) commitments.

Meanwhile, the Administration will report that total FY2009 federal revenues will turn out to be $83 billion less than what they predicted in May ($2.074 trillion vs. $2.157 trillion). That’s LESS — meaning that the revenue realization is bad news, contributing to a worsening, not improving, deficit outlook. Incidentally, revenues of $2.074 trillion would put them at just around 14 1/2 percent of GDP–the lowest they’ve been since 1950 and perilously close to setting a new post-WWII record low (if they fall below the 1950 level of 14.4 percent). This is more clear evidence that the federal revenue system faces a “crisis” as significant as the crises facing our entitlement programs.

With only shorter-term spending lower than expected, nothing yet accomplished to “bend down the curves” on longer-term spending, and revenues looking increasingly inadequate to fund our short-term and longer-term needs, it’s hard to be optimistic about what the $1.6 trillion (”not-as-bad-as-$1.8-trillion”) deficit really means. What will be an important indicator of how the fiscal outlook has changed since May is what the Administration will show on Tuesday about the deficits in 2012 and 2013–well past the current recession. Are revenues expected to be (more) sufficient by then, once the economy is growing strongly again? Will the “recovery” spending have gone away by then, once the economy has “recovered” and it’s no longer needed? Or we still have a version of “Cash for Clunkers” (or its latest equivalent) going on? And will we still not have passed a form of health care reform that makes the hard choices necessary to really effectively “bend the health cost curve” down? Standards (and the world) have surely changed when we fiscal hawks can “hope” that the previously-projected annual deficits of “only” half a trillion dollars by 2012-2015 (and only worsening after that) will come true.

Those are some of the reasons why I wouldn’t be surprised if the Administration says on Tuesday that their new projection for next year’s (fiscal year 2010) budget deficit is now worse than they previously thought–that it will turn out to be larger than $1.258 trillion (or 8.5 percent of GDP). That’s why I worry that today’s “good news” on the deficit just borrows from what would have been better news about future deficits. I worry this is just a case of “premature celebration.” If anyone is really such an optimist that they’re actually celebrating about this, I mean.

--Cross posted from Economistmom.com