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Washington has gotten deficit religion, or at least that’s what you’d infer from recent rhetoric. From the president to congressional leaders to the newest representative elected by tea party supporters, everyone in town promises to bring the federal deficit under control. Maybe not this year—the economy is still too fragile—but soon. The president wants to freeze discretionary spending for the next five years. Republicans promise to cut this year’s spending by $100 billion—or maybe less because we’re already halfway through fiscal 2011. But actions speak louder than words and recent actions show no real signs of increased fiscal responsibility.
The Congressional Budget Office’s release last week of its semiannual budget projections showed how hard the job will be and how much worse the situation has gotten. CBO’s official estimates by law assume current law—in particular, that scheduled tax increases will actually occur. Last August’s estimate showed the federal deficit shrinking rapidly from 8.9 percent of GDP last year to 7 percent this year and less than 3 percent the last half of this decade (see red area in first graph). From there, reaching budget balance seemed feasible: trim spending, raise taxes a bit, and you’re there.
![First-Graph](/sites/default/files/wp-content/uploads/First-Graph_5.gif)
Then came December’s compromise tax bill that temporarily extended the Bush-era tax cuts and others from the 2009 stimulus bill and also added a one-year payroll tax cut. Deficits balloon for the next two years—to nearly 10 percent of GDP this year and not much lower next—and are marginally higher than the August estimates for the rest of the decade. Balancing the budget became even harder. Note that not all of the deficit increase derived from the tax bill: CBO projected a weaker economy than it had anticipated in August, which meant both lower revenues and higher spending over the next few years. Even so, however, the deficit would still hover just over 3 percent of GDP after 2015, a manageable level if the economy returns to normal growth.
But every budget maven knows that CBO’s mandated assumption of current law playing out in the future clashes with reality. On the tax side, Congress is almost certain to extend most, if not all, of the Bush-era tax cuts beyond their scheduled expiration in 2013. And many observers are betting that at least some of the tax cuts from the 2009 stimulus will live past their expiration dates too. Extend all of those and the annual deficit roughly doubles (see dark pink area in the second graph). If we also include the so-called extenders—tax provisions that Congress renews each year—the deficit swells another half percentage point (the light pink area in the graph). In 2020, the deficit would exceed $1.5 trillion.
![Second-Graph](/sites/default/files/wp-content/uploads/Second-Graph_4.gif)
We’ve given this lesson before but can’t repeat it often enough: continuing to extend the tax cuts from the past decade digs a budget hole too deep to climb out of by cutting spending unless we’re willing to slice away more than just waste, fraud, and abuse. And on the other side of the ledger, as Rosanne Altshuler, Katie Lim, and I showed in a 2010 paper, tax increases big enough to tame fiscal deficits by themselves are probably both politically infeasible and economically unwise.
Almost everyone agrees that trying to balance the federal budget while the economic recovery remains fragile makes little sense. But the new CBO numbers remind us once again that we can’t continue to ignore fiscal deficits and that solutions will involve both lower spending and higher taxes.
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