This year will mark the end of a four-year string of trillion-dollar-plus federal deficits that have troubled the American public and caused turmoil on Capitol Hill.
This year will mark the end of a four-year string of trillion-dollar-plus federal deficits that have troubled the American public and caused turmoil on Capitol Hill.
Fiscal Year 2013 is drawing to a close with a projected deficit of a little over $640 billion, down from $1.1 trillion last year. That’s good news, but it should hardly be considered an “all clear” signal on the nation’s fiscal and economic challenges.
Here are eight reasons why:
1. While the deficit is going down, the federal debt is still going up.
The government is still borrowing a substantial amount of money this year, and that is all being added to the accumulated debt, which is approaching $17 trillion. That’s why elected officials — despite their usual lamentations and finger-pointing — have no choice but to raise the debt limit at some point in the next few months. The real question is what they will do to prevent the debt from growing in the future to unsustainable levels.
2. This year’s lower deficit can be largely attributed to short-term economic factors rather than systemic reforms in the federal budget.
During difficult economic times with high unemployment, federal deficits rise as government spending increases on assistance programs, and tax revenue takes a hit. As the economy recovers, these trends naturally reverse.
So this year’s lower deficit hardly comes as a surprise. In fact, it’s not really lower if measured against the deficit projected for 2013 by the Congressional Budget Office just a year ago this month: $641 billion. The recent “good news” essentially made up for the deficit increase caused by the fiscal cliff deal in January that locked in most of the Bush tax cuts.
3. The big long-term pressures on the federal budget remain.
Projections indicate the deficit will begin climbing again in two or three years, with total borrowing well over $6 trillion in the coming decade. Two key drivers of the projected deficits are the aging population and rising health care costs.
Thousands of additional baby boomers become eligible for Social Security and Medicare each day, which means the government must spend substantially more money just to provide the same individual benefits as in the past.
As for health care costs, they are not rising as quickly as they have in the past. But experts are uncertain about why this is and how long it will continue. And in any case, health care spending increases are still outpacing economic growth.
These and other pressures on the federal budget account for tens of trillions of dollars in unfunded federal liabilities that dwarf the official federal debt figure. So far, little has been done to address this problem.
4. Prospects for a full economic recovery are uncertain.
While the U.S. economy appears to be gaining strength, continuing concerns include stubbornly high unemployment rates, upcoming Federal Reserve decisions, continuing turmoil in the Mideast and economic problems in Europe and China.
If these or other difficulties cause the U.S. economy to falter, short-term federal deficits can be expected to quickly rise once again.
5. The government — in other words, taxpayers — can expect to pay much higher interest costs in the future.
One factor is the rising federal debt. The other is that interest rates, which have been extremely low by historical standards, are starting to rise and are expected to continue doing so in the years ahead.
The government now pays about $200 billion a year in interest costs. Projections indicate it could be paying much more — perhaps $900 billion a year — a decade from now, which is likely to siphon money away from national priorities.
6. Washington has yet to grasp the importance of long-term fiscal reform.
Elected officials still seem to be waiting for a crisis, which is a good way to get one. Yet there is no shortage of possible solutions.
The National Commission on Fiscal Responsibility and Reform (Simpson-Bowles), the Bipartisan Policy Center’s Debt Reduction Task Force (Rivlin-Domenici), and other groups have put forth many solid proposals to help put the budget on a better course.
Elected officials have failed to vigorously pursue most of these proposals. They have taken some positive steps in the last two years. But they have also relied heavily on the poorly designed sequester, over-focused on cutting one part of the budget (“discretionary spending” approved each year by Congress), and approved some measures that will actually increase deficits in the future.
Much more remains to be done to get the federal budget on a sustainable track. Further delay will only make the problems more difficult to solve — and the necessary sacrifices even greater.
7. Budgetary crises still loom even in the short term.
With Republicans and Democrats in a stalemate, Congress has failed to pass a single spending bill for the fiscal year that begins in just a few weeks. There are widespread predictions that lawmakers will again resort to short-term continuing resolutions to keep the government running.
Meanwhile, some lawmakers are again threatening not to increase the federal debt limit unless they get what they want (such as repeal or defunding of “Obamacare”) even though this route would mean a government default that could trigger a meltdown in global financial markets.
8. The stakes remain extremely high, particularly for younger Americans.
Regardless of this year’s drop in the deficit, failure to put the federal budget on a more responsible and sustainable long-term track would have devastating consequences not only for the American standard of living but for our position of world leadership.
Even worse, we would be leaving our children, grandchildren and future generations with massive debts and diminished prospects for the future.
We should all be able to agree on at least one thing: They deserve better.
