Obama's Budget Kicks the Can Even Further Down the Road

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This week President Obama released his $4 trillion budget for 2016, a mixed bag of new taxes and new programs and subsidies for the middle class. Last week the Congressional Budget Office (CBO)-Washington's nonpartisan budget arbiter-released its most recent analysis of the economy and fiscal policy. The two documents provide an interesting comparison of political expediency and long term challenges, with the president focusing on short-term spending while CBO warns of a longer term fiscal crisis.

The CBO report estimates that the deficit for 2015 will be $468 billion, slightly lower than this year, and the latest drop in a six year string of falling deficits. While this is welcome news, the CBO is quick to warn that these improvements are only temporary; increased spending, primarily on mandatory programs-will reverse these gains after three years as both deficits and the public debt begin to rise to historic levels. The president's budget, on the other hand, points to the lower deficit and increasing employment as a signs of success and calls for new spending and an end to sequestration.

The CBO study raises important concerns about the long-run fiscal health of the economy that the president's budget fails to address. Economists such as James Buchanan have long warned of the dangers of deficit spending and rising public debt. Specifically, Buchanan warned that the tradition of fiscal discipline has been eroded by Keynesian notions of fiscal activism filtered through the politics of Washington. As economists downplayed balanced budgets in favor of fiscal interventions, politicians of both parties found justifications for expansive new spending programs that are politically expedient yet economically unsustainable.

For example, the president and others point to this year's low deficit number as a sign of success, but this is simply indicative of the myopic policy views in Washington and ignores the dangers raised by Buchanan. With time horizons that often fail to stretch beyond the next election, addressing long run structural problems such as unsustainable entitlement programs becomes challenging. Rather than laud a temporary lull in deficit financing, policymakers should be addressing the long-run spending problems.

While Obama's budget highlights new spending programs for the middleclass, the CBO budget outlook suggests that such excessive spending rather than a lack of revenues that is the long -run budget concern: "Outlays as a share of GDP are projected to rise significantly more than revenues over the coming decade-by two percentage points, from 20.3 percent in 2015 to 22.3 percent in 2025." And it's not as if revenue collections are down. According to the CBO, if current laws do not change, federal revenues will rise to 18.3 percent, well above the 50-year average of 17.4 percent. President Obama's budget pushes revenues even higher. In 2025 President Obama calls for revenues of 19.7 percent of GDP-2.3 percent higher than the long-run average.

Rising debt is a function of additional deficit spending and increasing outlays on mandatory programs, including Social Security, Medicare and Medicaid, and the subsidies for purchasing health insurance through the exchanges created under the Affordable Care Act. Given the expanding retirement population, the expansion of medical care, and the costs of providing health care, federal outlays are forecast to expand at a rate that outpaces both federal revenues and growth in economic output.

Moreover, mandatory spending is rising as a percent of GDP, while discretionary spending contracting. This means that beyond financing the entitlements, the federal government will find it more difficult to fund discretionary government programs. Politicians will be faced with a difficult choice. Either there will need to be cuts in federal programs, or else taxes or deficit spending must increase.

This is not the first time the CBO has raised concerns over the fiscal outlook. In fact, for some time the agency has warned that the lack of fiscal discipline is leading to an unsustainable economic situation. According to the most recent report, without reform, "federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year-more than twice what it was at the end of 2007 and higher than in any year since 1950." By 2025, that figure rises to 79 percent of GDP, and in the CBO's long range forecast, the debt held by the public reaches 100 percent of GDP in 2039.

Finally, there is the impact of interest on the debt. Not only does excessive public borrowing create a fiscal drag on the economy, as the federal debt rises, so does the cost of servicing that debt. In 2014, the federal government's net interest payments totaled $229 billion, by 2015 that figure is expected to roughly quadruple to $827 billion.

Far from a gold star for the recent low deficit levels, the CBO report is an indictment of the nation's long-term fiscal health. For too many years, entitlements such as social security and health care have been viewed as the "third-rail of politics" to be avoided at all costs. As a result, any attempts at reform have been unenthusiastic at best, with a series of quick fixes to pass the issue to future Congresses. President Obama's budget continues to focus on providing short-run benefits while offering no solutions for growing fiscal challenges. As a result, the problem is kicked down the road one more time, leaving the next generation holding the bag.


Wayne Brough, Ph.D is Chief Economist and Vice President of Research at FreedomWorks.  

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