The deficit is about to get a lot worse, a lot faster.
At least that's the latest projection by the Congressional Budget Office. In the past six months, Washington's medium-term fiscal health has deteriorated markedly, and what CBO once projected to be a small surplus beginning in 2012 has now morphed into annual deficits in excess of $100 billion as far as the eye can see (to borrow a phrase).
In March, CBO projected a modest 10-year surplus of $270 billion. Now it forecasts a cumulative deficit of, gulp, $2.3 trillion. Debt held by the public in 2018: Nearly $8 trillion. The annual deficit as the new president takes office: $438 billion.
Weighed against this grim news, of course, are the presidential candidates' happy promises to cut taxes and increase spending. With the deficit news increasingly bad, these promises look increasingly unreal. TPC estimates Barack Obama's tax plans alone would add $3.5 trillion to the burgeoning debt over the next decade, while John McCain's would increase the debt by more than $5 trillion—including extra interest costs.
Why did the CBO forecast change? Two big reasons: More spending, mostly on the wars in Iraq and Afghanistan, as well as a softer-than-expected economy that reduces revenues and increases domestic spending for the next couple of years.
Now, it is surely true that the CBO baseline will turn out to be wrong. Not only is forecasting 10 years into the future perilous, but CBO is required to assume that all current laws will continue. Thus, on the spending side, it may be overstating long-run war costs. However, it also overstates revenues, since it also must also assume that the Bush tax cuts all expire in 2010, scores of "tax extenders" such as the R&D credit will disappear, and the Alternative Minimum Tax will hit tens of millions of middle-class taxpayers—none of which is likely to happen. And it excludes any taxpayer costs of cleaning up the Fannie Mae and Freddie Mac mess.
Despite its flaws, this forecast is a good indicator of the direction federal deficits are heading, and future does not look good. Keep that in mind as you listen to McCain and Obama squabble over who is promising to cut taxes more.
