Not all deficits are created equal.
In designing policy responses, it is important to distinguish between “cyclical” and “structural” deficits.
Cyclical deficits are caused by a weak economy. Recessions drive down government revenue because many workers and businesses are no longer earning as much taxable income. At the same time, government spending rises because more people need assistance through programs such as Medicaid, unemployment benefits and food stamps.
The Congressional Budget Office (CBO) provides a critical service for policymakers and the public: projecting the budgetary and economic impacts of proposed legislation. Since its inception in 1974, CBO has established an unparalleled track record for objectivity and analytical rigor.
Many politicians who want to simultaneously receive credit for promoting fiscal responsibility while avoiding the tough decisions required often look for easy solutions. The two most common of these are pledges to cut “waste, fraud and abuse” and to “grow our way out of the problem.” These supposedly easy options, however, are not enough to address our nation’s long-term fiscal challenges.
The heart of the nation’s long-term fiscal challenge is a changing demographic landscape. The ongoing retirement of the baby boom generation will continue to slow the growth rate of the workforce, which will slow potential economic growth (GDP) compared to earlier decades. According to CBO, the average annual growth rate of potential labor was 1.4 percent from 1950 to 2016. Due mostly to the baby boomer retirements, CBO projects that rate will fall to just 0.5 percent by 2027.