- The Washington Times - Wednesday, June 24, 2009

ANALYSIS/OPINION:

After projecting it for years, America is now experiencing its fiscal future. Throughout the current financial crisis, the urge has been to look backward for precedents, most notably the Great Depression. However in the case of this crisis’ fiscal impact, the best precedent may actually lie in the future.

Counterintuitive as this might seem, the most pertinent scenarios for the current fiscal flood lie in America’s looming entitlement tidal wave. The current recession has in effect fast-forwarded America into a fiscal situation not anticipated for decades.

In December 2007, CBO Director Peter R. Orszag stated: “The economic outlook right now is particularly uncertain. Most backward-looking indicators suggest a relatively healthy economy. … But [it] has been buffeted this year by several interlocked shocks and the risk of recession is now elevated. Most analysts currently believe the economy will avoid a recession but will grow relatively slowly for several quarters.”

That was just 18 months ago. The Congressional Budget Office (CBO) has since reported that the federal government reported its first April deficit ($19 billion) for the first time since 1983. This despite the fact April is usually an enormous surplus month for the federal government because of income tax payments.

The change in overall figures is staggering. Estimates of 2009 gross domestic product have fallen three-quarters of a trillion dollars or 5 percent. Federal revenues have fallen almost a quarter, while outlays have surged almost a third. The effect on the deficit somehow seems to be greater than the sum of these parts.

Current 2009 deficit estimates are well more than 8 times larger than they were in December 2007 - and that does not include the $100 billion in the recently passed war supplemental.

As enormous as these raw numbers are they still don’t do justice to what has transpired. For longitudinal comparability, we need to compute these totals as percentages of GDP. Put in those terms, currently estimated revenues will fall to a level not seen since 1950. However to truly appreciate the level of currently projected outlays and deficits, we need to look forward.

Coincidentally CBO also did a report in December 2007, on long-term federal budget projections. Its verdict: absent “significant changes in policy … projections raise fundamental questions of economic sustainability.”

What is interesting is that at 27.4 percent of GDP current outlays have now catapulted themselves into the range of the 2050 midpoint of these long-term projections. The current deficit has shot forward even further. Propelled by recession on both ends - by revenues falling 3.5 percent of GDP and outlays rising by 7 percent of GDP - the deficit’s current 11.9 percent of GDP is well-past the midcentury mark of CBO’s long-term projection.

The current recession has effectively leapfrogged us into a fiscal scenario not envisioned for decades. Granted, it is not expected to last. The CBO’s projections show revenues and outlays moving back toward their historical shares of GDP. Yet while today may offer no more than a glimpse of our fiscal future unless changes are made, the comparison is far more important than just a budgetary parlor trick.

Today’s current financial crisis gives vivid insight into what a long-term fiscal crisis will look like. And how quickly it can happen. The Scylla and Charybdis of falling revenues and rising outlays can rush together in a clash of deficits faster than we anticipate. As current circumstances show, these factors are likely more self-reinforcing than mere projections have accustomed us to believe.

However, the most important difference between today and tomorrow’s deficits is longevity. Unlike what we hope will be a relatively short-lived recession-fueled deficit, without reform the coming deficits will be sustained. Today’s deficit highwater mark should cause all to take a hard look at the hard times the future will offer unless near-term action prevents the unremitting return of today’s deficits.

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.

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