- - Saturday, March 2, 2013

Washington’s fiscal problem can be succinctly summarized: It’s the spending, Stupid. For anyone still doubting, you need look no further than the Congressional Budget Office’s just-released estimates for the next decade. The verdict: Federal outlays spiked with the recession, remained high and will rise from there – even with their recent hike, revenues simply cannot keep pace. 

Like a connect-the-dot picture, CBO’s “The Budget and Economic Outlook: Fiscal Years 2013 to 2023” lays out the salient points of Washington’s fiscal dilemma. The image is not pretty. 

What passes for good news comes this year. The federal deficit is projected to fall below $1 trillion for the first time in five years. It is expected to remain a staggering $845 billion – roughly $400 billion more than the amount for which the Bush administration was assailed in 2008.  

Then the bad news really begins: “Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.”   

The key point from that fearsome foursome is that all of these are due to growing spending.  

Yet could not falling revenues, as occurred during the recession and subsequent “slow recovery seen since the recession ended in mid-2009” still be a culprit? 

According to CBO estimates, the New Year’s tax hike has addressed that issue – but good. “Federal revenues will increase by roughly 25 percent between 2013 and 2015…[and] revenues are projected to grow from 15.8 percent of GDP in 2012 to 19.1 percent of GDP in 2015 – compared with an average of 17.9 percent of GDP over the past 40 years.” 

Washington’s fiscal problem is that spending will also be above its past levels – only more so. “Although outlays are projected to decline from 22.8 percent of GDP in 2012 to 21.5 percent of GDP by 2017, they will still exceed their 4-year average of 21 percent.” They also resume growing – reaching 22.9 percent of GDP by decade’s end – while revenues on the other hand stay at their current GDP ratio.  

To underscore that spending, not falling revenues, is driving the deficit: “Under CBO’s baseline projections, most of the decline in the deficit in the next two years is the result of a projected significant rise in revenues, which are estimated to increase by 25 percent between 2013 and 2015.”  

OK, that’s “then,” but isn’t the present deficit the fault of revenues? Actually, “federal revenues increased by $147 billion (or 6 percent) in 2012, and they are projected to grow by $259 billion (or 11 percent) in 2013.” In comparison, had it not been for a federal payment shift, “outlays in fiscal year 2012 would have been about the same as in fiscal year 2011.” So revenues increased – at almost three times the economy’s growth rate – while spending stayed flat.   

 Flat is decidedly not what federal spending has been during the recession. It increased $535 billion from 2008 to 2009, an 18 percent jump. Simultaneously, the deficit increased by almost $1 trillion – from $459 billion to $1.413 trillion. Spending peaked at $3.6 trillion in 2011, and there it has pretty much stayed – $3.5 trillion in 2012 and an estimated $3.6 trillion again this year. 

The verdict on what happened to the federal budget is clear. During the recession, spending spiked; there it stayed for three years, and soon it will begin to soar…again.  There is no way for revenues to keep up with it and for the economy to keep growing at the same time.  

Precisely identifying Washington’s spending dynamic, CBO sums up: Not only are an aging population, increased health care cost and subsidies, Social Security spending and debt service costs the spending problem, but “spending on all other programs – in the aggregate – is projected to decline relative to GDP between 2014 and 2023.” 

The spending problem is real, it is not new, it is not going away, it is going to get worse, and it is due to the four areas identified.  

To address it, Washington must not only reach the heretofore elusive “grand bargain,” but that agreement must be centered on entitlement reform, putting these programs on a sustainable course. This needs to be done before interest rate increases spur debt service costs, and entitlements really begin their explosion. 

If this spending threat sounds all too familiar – you need only look to Europe to see why. It is past time for Washington finally to recognize that the unaffordable is not unavoidable. 

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.