The deficit is shrinking, but it’s too soon to celebrate a return to sanity. America is still sinking more into debt by the minute and is still on a path to ruin.
The Congressional Budget Office (CBO) reported last week that the government will borrow just $642 billion from China, as opposed to the $845 billion previously expected. That’s about as good a bit of news as a homeowner learning he has “mostly maxed out” his credit card instead of “totally maxing it out.” America’s long-term fiscal situation remains as unsustainable as ever.
Even after the official revisions, the deficit is 4 percent of gross domestic product, well above the 2.4 percent annual average that held before President Obama moved into 1600 Pennsylvania Avenue. As long as entitlement spending continues unchecked, mandatory spending will take up an ever-increasing share of the budget. The deficit will remain closer to 4 percent of GDP than 2.4 percent, even under the budget office’s rosiest of scenarios.
The congressional accountants also expect tax revenues to increase until they swallow nearly $1 out of every $5 produced by the private-sector economy. This is far more than the historic averages. Under the most optimistic economic forecast, cumulative deficits will add $6.3 trillion to the national debt between 2014 and 2023. To put that in perspective, the budget office estimates that debt held by the public would reach 74 percent of GDP within 10 years, far above the average of 39 percent.
The crocodile tears that big-government advocates cry over sequestration cuts are meant to lend the impression that spending is coming under control. But it isn’t. Over the past seven months, the “cut” has amounted to 0.5 percent of total federal spending, but that reduction has nothing to with reducing the deficit. That deficit is shrinking because taxes are up, and the government housing giants Freddie Mac and Fannie Mae are making repayments.
Government revenues are up by about 15 percent, as almost every American who gets a paycheck was slammed by a 2 percentage point hike in the payroll tax at the start of this year. Wages that once showed up in their pockets went instead into the tax man’s pocket. Income-tax rates also went up for some this year, and the higher taxes are reflected in the declining deficit.
There are some troubling factors at play in the deficit “improvement.” The savviest of high-income taxpayers chose to realize income in late 2012 so that they’d pay taxes on it in 2013. They anticipate even higher taxes in the days ahead.
They ought to anticipate higher spending, too, as spendthrift politicians abandon the pretense of sequestration savings. The Congressional Budget Office says that under this scenario, the debt will jump by $8.8 trillion in a decade, hitting 83 percent of GDP.
So the deficit dip is temporary, and eventually we’re going to run out of borrowed money. Because the administration and congressional Democrats stubbornly refuse to address spending on Social Security, Medicare and Medicaid — which are the biggest drivers of the debt — the day of reckoning will be sooner rather than later. It won’t be fun.
The Washington Times