The time of economic crisis and emergency government spending programs might be over, but the high federal debt is sticking around.
When the Congressional Budget Office reports on President Obama’s fiscal 2016 budget proposal this week, it will find an aggressive plan to capitalize on the economy’s near-recovery by spending trillions of dollars on new government programs to combat inequality.
It will not find a plan to lower the U.S. debt. Obama’s budget estimates the federal debt at 74 percent of U.S. economic output in 2024, the same share of gross domestic product it is today. That is a major increase from its fiscal 2015 budget, which saw the debt declining to 69 percent of GDP in 2024.
While the “shadow of crisis has passed,” as Obama said in his State of the Union address, the doubling of federal debt that accompanied the crisis has not. And he has no plan to reverse it.
Treasury Secretary Jack Lew trumpeted the “end to mindless austerity” when discussing the budget last week.
Lew previously said in February that the economic recovery, now officially in its sixth year, has entered “self-sustaining growth.”
An accelerating and self-sustaining recovery usually would be the best time, in mainstream economic theory, for cuts or reforms to the entitlement programs that budget experts warn will make the federal debt unsustainable in the long run.
The CBO projects that based on current trends, interest payments on the debt will exceed spending on defense programs and domestic discretionary spending starting in 2022 under current law. Spending on healthcare programs will jump from $926 billion or 5.4 percent of GDP in 2014 to $1.9 trillion, or 6.8 percent of GDP in 2025.
In other words, spending for the healthcare benefits of Baby Boom retirees and on the debt incurred for that spending could begin to crowd out federal spending on everything else, including defense.
But Obama doesn’t see the present time as a normal one. Instead of large-scale reforms to those entitlement programs, Obama’s budget calls for a new focus on mitigating inequality and building up the middle class through government-spending initiatives, including by making community college free to students, infrastructure projects, and refundable tax credits.
The country “would be making a critical error if we avoided making these investments. We can’t afford not to,” Obama said on the release of the budget of the new focus on middle-class programs.
Since Republicans took over the House in 2011, Obama has decried their efforts to reverse his earlier efforts to goose the economy with the 2009 stimulus bill. He also has contributed to fiscal tightening with tax cuts imposed in Obamacare and the 2012 fiscal cliff deal that raised rates for top earners.
But at long last, fiscal policy is no longer tight, according to the Brookings Institution’s fiscal barometer, which measures the impact of federal and state taxation and spending on GDP. Over the past year, fiscal policy has moved toward adding to GDP rather than subtracting.
Similarly, in a supplement to the budget, Obama’s budget team noted that fiscal “drag” receded over 2014 and that “going forward, real government purchases are expected to have a roughly neutral impact on economic growth.”
In fact, the budget separates “cyclical” deficits, attributable to spending on emergency measures such as food stamps and extended unemployment benefits, which are used more during recessions, to “structural” deficits, consisting of everything else. While the Obama administration sees the cyclical deficit falling to zero by 2018, the structural deficit remains at 2.5 percent into the mid-2020s, even as the economy is projected to return to full health and remain at that level of strength. In other words, the deficit will range from $500 billion to $700 billion even during the”boom”part of the business cycle.
At nearly 70 months in duration, the current economic expansion is already almost a year longer than the post-World War II average recovery, as defined by the National Bureau of Economic Research.
Obama’s budget director, Shaun Donovan, defended the decision not to pursue austerity during the economic upswing in a briefing with reporters last month.
Donovan argued that the budget was a “substantial change from the status quo,” building on the reductions that have seen deficits under Obama fall from more than $1 trillion a year to $483 billion in fiscal 2014.
Noting that government spending on healthcare programs, such as Obamacare, Medicare and Medicaid, is projected to drive the growth in debt beyond the 10-year budget window, Donovan argued that the Obama administration has implemented reforms through the Affordable Care Act “that could way overperform.”
“We’re making some tough decisions in our Medicare and Medicaid choices,” he said, adding that cutting spending on research and design, infrastructure, and education “is both pennywise but certainly pound foolish.”
But that optimism about healthcare spending is not shared by congressional Republicans, who are working on their own budget resolution, due April 15.
House Budget Committee Chairman Tom Price, a Georgia conservative, has said he wants to balance the budget sooner than in 10 years. Senate Budget Committee Chairman Mike Enzi also has stated a desire to balance the budget and set debt on a declining path, with spending cuts front-loaded to avoid relying on future congresses to lower deficits.
Last year, the budget submitted by former Budget Committee Chairman Paul Ryan of Wisconsin would have reduced the federal debt to 54 percent of GDP by 2025, according to the CBO.
