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Is Our Debt Problem Over?


This afternoon the Congressional Budget Office released a revision of its budget outlook for FY 2013. Things seem to be looking up, at least on a superficial level. According to the document, the deficit this year won’t be as high as originally projected and it will reach its lowest level since 2008: $642 billion. According to MarketWatch:

The Congressional Budget Office on Tuesday slashed its estimate of the current year deficit by $200 billion to $642 billion, which would represent the lowest deficit since 2008 and a deficit-to-GDP ratio of 4%. The reduced deficit comes mostly on higher-than-expected revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac. The CBO said the debt-to-GDP ratio will fall from around 76% of GDP in 2014 to slightly below 71% in 2018, but then start rising again. By 2023, the CBO says debt will equal 74% of GDP and continue to be on an upward path. 

Before everyone starts jumping for joy, here are a few things to remember. First, a 76 percent debt-to-GDP ratio is still much higher than the 36 percent level of the end of 2007. Unfortunately, even under the new scenario, the debt-to-GDP ratio will still be around 74 percent at the end of the decade. That’s if Congress doesn’t overturn sequestration and if all the CBO projections materialize. Under an alternative scenario, debt will be above 85 percent of GDP by the end of the decade.

Second, according to CBO, the government is still spending too much money and the gap between spending and revenue isn’t narrowing over the next ten years. Here is a chart from CBO:  

As a result, CBO is projecting that the deficit will be $895 billion at the end of the decade and net interest paid on our debt will be $823 billion. And that’s before the explosion in entitlement spending that will take place in the budget window not visible in this chart. 

And in fact, CBO isn’t popping the champagne yet. First, there is this chart:

Then CBO writes:

Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges. Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

In other words, now is not the time to fall asleep on the switch and stop worrying about spending. The government is still too bloated and its size and scope need to be reduced.