How low will it go? No doubt that question crossed some minds this week after the non-partisan Congressional Budget Office said it had lowered its forecast for the 2014 federal deficit.
The CBO now thinks the gap between federal spending and revenues will be $492 billion—$23 billion lower than its February estimate. The agency also reported a $286 billion reduction in its 10-year deficit forecast, to $7.6 trillion.
A deficit of nearly $500 billion is not small change, but it’s down sharply from the $680 billion shortfall in 2013 and a far cry from the four straight years of $1 trillion-plus deficits before that. Indeed, this year’s budget gap will be the smallest since 2007.
Measuring the deficit as a percentage of gross domestic product underscores the dramatic drop. This year’s gap is expected to be 2.8 percent of GDP, down from nearly 10 percent in 2009 and lower than the 3.1 percent average of the last four decades.
Looking ahead, the CBO sees more deficit shrinkage the following year—but then things turn in the wrong direction.
After 2015, the budget gap is expected to climb sharply, hitting $1 trillion again from 2022 to 2024. As a share of GDP, the shortfalls will rise from 2.6 percent to roughly 4 percent near the end of the 10-year period.
Even more worrisome is the outlook for the nation’s debt. Fed by years of spending to combat the Great Recession, federal debt held by the public reached 72 percent of GDP at the end of last year, and CBO baseline projections show an increase to 78 percent by 2024. Just six years ago, it was 35 percent of GDP.
If or when interest rates rise, this debt load could become a real drag on economic growth. And it would limit the government’s ability to respond.
Clearly, Washington lawmakers need to be working on a long-term budget plan that addresses these debt and deficit trends. Yet all the evidence suggests it’s not happening. With a short-term budget deal in place, any sense of urgency has dissipated.
Ten years down the road, how the nation’s fiscal picture looks will largely be the result of actions taken now. We should not let this opportunity to get it right slip away.
4/18/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email [email protected]