Deficit hawks face a serious problem in advancing their message: Declining deficits and debt.
While the federal debt remains unsustainable in long-term projections, economists expect it to decline slightly in the next few years. The good news won’t last forever, but it will make it harder for budget hawks to raise alarms over the looming debt problem.
“I think it’s going to be very hard to make that policy case,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a centrist group that advocates budget reform. “I think it’s going to be hard to break through the short-term improvements” to influence lawmakers and voters suffering from “deficit fatigue,” MacGuineas added.
Although the federal debt held by the public has doubled since the 2008 financial crisis, it is expected to decrease in the years ahead. Annual deficits have fallen rapidly as the economy has improved and Congress has cut spending, including through sequestration. The deficit will bottom out at $469 billion in 2015, according to the Congressional Budget Office’s baseline. The debt will then decline from 74.4 percent of economic output by the end of this year to 72.8 percent in 2018.
Only after that will the debt begin to creep up. As the baby boomers move further into their retirement years, the government will spend more on Social Security and healthcare for them through Medicare. Spending on Medicaid and health insurance subsidies also will grow as Obamacare takes effect. Rising interest rates will raise the cost to the Treasury of borrowing as the debt mounts, raising spending on interest payments on the debt.
The CBO’s baseline expects net interest payments to double between 2014 and 2024, reaching nearly $800 billion that year. Social Security, healthcare programs and paying off interest will account for 85 percent of the increase in debt over the coming decade, according to the CBO, and total debt will reach 77 percent of output. Debt then increases indefinitely through 2089, eventually reaching 225 percent of gross domestic product.
Private-sector economists see a similar scenario, although predicting the future of deficits and debt is difficult and subject to uncertainty.
“[R]ecent budget improvement has created breathing room in the near term,” Goldman Sachs’ Alec Phillips wrote in a recent research note, even if “fiscal policymakers have additional work ahead of them before the longer term outlook can be described as sustainable.”
That means that the strategy for pushing budget reform must change from what it was in recent years when both parties were willing to negotiate over a “grand bargain” on taxes and fiscal policy to reduce deficits, MacGuineas said.
“For now, we’re hoping to do no harm,” she said, by maintaining “pay as you go” budgeting for any new programs. Such a policy, which Congress has mostly followed in recent years, mandates that legislation does not increase the deficit, meaning that a new spending program would have to be offset by cuts or tax increases elsewhere in the budget.
MacGuineas also recommended casting debt reduction as part of a larger program to facilitate economic growth through reforms that boost efficiency, an approach shared by other deficit hawk.
“It’s not just deficit reduction. We believe that most of these programs are a net drag on growth,” said Barney Keller, communications director for the fiscally conservative political advocacy group Club for Growth. “They’re leading to a less prosperous nation and future.” Keller, however, does not view CBO’s flat baseline for debt over the next few years as believable. “We don’t really care what the CBO says, the CBO is a joke,” said Keller, adding that “cash flow is reality.”
Convincing voters that federal debt is out of control during a period of falling deficits is not difficult, said Rep. Mick Mulvaney, a Republican from South Carolina known as a staunch fiscal conservative. “Take all the trillions out, take all the economics out, and put it like this: In 10 years, we’ll spend more on interest than on defense, and 40 years from now we’ll be spending every penny on interest,” Mulvaney explained. “People are responsive to that,” he said.
The CBO does project interest payments to outstrip defense spending by 2024, although they’re still well below government revenues in 2054 in the CBO’s long-term budget outlook.
Jacqueline Bodnar, a representative for the libertarian political group FreedomWorks, said that the sheer size of the federal debt is enough to convince voters to favor spending cuts.
“Our strategy is to continue educating citizens on the bigger picture. Falling deficits are temporary, and they don’t begin to chip away at our $17 trillion in national debt,” Bodnar told the Washington Examiner.
