Some Sobering Fiscal Arithmetic

Eakinomics: Some Sobering Fiscal Arithmetic

Nothing like a good dose of ice-cold fiscal reality to start your Friday! Strap in and channel your inner masochist. Reproduced below are some of the features of the recently released Congressional Budget Office (CBO) baseline budget outlook – the answer to the question: “What happens if we leave the federal budget on autopilot?”

It’s pretty grim. The deficit rises from $1.4 trillion in fiscal year (FY) 2023 to $2.9 trillion in FY2033. Because of the large amount of debt, nearly half of that future deficit ($1.4 trillion) stems from interest costs alone. Simultaneously, the debt (in the hands of the public) is rising from 98 percent of gross domestic product (GDP) to 118 percent – the highest  amount at any time in U.S. history. Ugh.



In the weeks to come, considerable attention will be paid to the pledge of some in the House of Representatives to bring the budget into balance by 2033 without raising taxes. That’s a Herculean lift. There are $20 trillion in deficits over the 10-year budget window, so it will take many trillions in spending cuts to arrive at a zero deficit in 2033. Without first achieving a bipartisan consensus, those cuts will be politically unpalatable, and the entire exercise will doubtless be characterized as unrealistic.

It is also probably unnecessary. If the United States wants to assure world capital markets of its creditworthiness and ratings agencies of its financial management capabilities, the real trick will be to stabilize the debt relative to GDP. As a bonus, that ratio could be put on a modest downward path in the future.

The bad news is that this more modest objective is no longer a modest budgetary exercise. Courtesy of my colleague (in budgetary misery) Gordon Gray, the table below lays out the mechanics of stabilizing the debt at 98 percent of GDP. Achieving this requires $7.1 trillion of primary deficit reduction over the next 10 years. The reduced debt accumulation kicks in another roughly $1 trillion in interest savings for total deficit reduction of $8.0 trillion. Put another way, there has to be an average annual deficit reduction equal to 2.1 percent of GDP. Notice, as well, that it also requires bringing the primary (non-interest) deficit into balance by 2033. Yikes! 



There are three takeaways from this exercise.  1) Never read Eakinomics before your morning coffee and Prozac. 2) The federal budget is in a deep world of hurt, and any measured pace of improvement still means accumulating an even more daunting level of debt, even as the hard fiscal lifting takes place. 3) Waiting just makes it worse, and the one fiscal trick D.C. has mastered is procrastination.