WASHINGTON: A declining US budget shortfall can't be taken for granted. Congress's wonks see Washington's debt-to-GDP ratio shrinking over the coming few years as the $500 billion annual federal deficit steadies.
Baby-boomer retirement and healthcare costs will, sadly, help reverse the trend over the next decade. Such long-term forecasts are only slightly better than guesses, but they suggest lawmakers still have hard choices to make.
President Barack Obama bragged last week that the deficit has been cut by two-thirds since his presidency began. The Congressional Budget Office on Monday gave him more to boast about, projecting that the federal deficit will continue to shrink until the 2016 fiscal year.
The US debt-to-GDP ratio, which accounts for output growth, will decline for longer - to 73.3 percent in 2018 from 74.2 percent this year - according to the CBO's forecasts.
The trouble is, the CBO sees deficits rising again thereafter, surpassing $1 trillion in 2025, with debt nearing 80 percent of GDP, a level not surpassed since World War Two. Under current law - one assumption the agency has to make - increases in spending will outstrip economic growth for Social Security, healthcare programs, and interest on federal debt. Even to push the 2025 debt-to-GDP ratio down to the level now forecast for 2018, lawmakers would have to reduce deficits by about $1.5 trillion in aggregate.
Even a painful measure like hiking the payroll tax by 1 percentage point would bring in only about half that sum over a decade, the CBO estimated in November.
It's Washington's way to think in 10-year periods, summing up all the numbers in a way that fails to adjust for the increasing unreliability of forecasts over time. Although the CBO tries hard, economic reality is bound to differ from its assumptions - as will the tax and spending framework with changing laws.
That said, the implication of the latest projections is that the deficit danger has been deferred by economic recovery but by no means defeated. The next big battle between higher tax and lower spending won't be Obama's to fight, but it's probably no more than a few years away.
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