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On Tuesday, the Congressional Budget Office released a new report revising its economic projections for the next ten years. The most striking feature of the report is a marked decline in the federal budget deficit, which the CBO has pegged at $845 billion for the fiscal year 2013. If accurate, this would be the first time the deficit has fallen below $1 trillion since 2008.
At first glance, this may appear encouraging to deficit hawks, but a closer examination of the numbers gives cause to be cautious in our optimism, and not to allow ourselves to slip into complacency. The projected deficit reduction comes entirely from new revenues, while spending continues to increase. It is important to remember as well, that the CBO’s projections are based on assumptions that current law will not change. For example, the budget sequestration process scheduled for March 1st is set to cut $1.2 trillion dollars over the next ten years. CBO guidelines require them to incorporate these cuts into their analysis, but whether they will actually happen is far from certain. If the process continues to be delayed, or is averted altogether, the current spending projection will significantly understate the budget deficit.
Furthermore, the new revenues included in the report are not the result of government action, but rather arise from last year’s increase in GDP. Any increase in economic activity will bring with it a corresponding increase in tax revenues. The economy grew at a meager 1.9% in 2012, and is projected to slow even further this year. Rather than continuing to raise taxes and impose draconian regulations on business, Congress should focus on adopting free market policies consistent with economic growth if they are serious about controlling the deficit.
The most worrying thing about the CBO’s report is the continued pattern of increased spending it depicts. Despite a great deal of talk about cutting spending, Congress has showed both a lack of will and ability to make the meaningful cuts that are the only way to reduce substantially the deficit in the short term. The so-called cuts that have been reported and touted by the media are illusory in nature, due to the baseline level of spending from which they are calculated. Thus, a reduction in the amount of spending planned for next year is counted as a cut, with no need to actually reduce the spending levels from last year.
Even taking the CBO’s report at face value paints a grim picture of our fiscal future, with deficits continuing to expand after 2015 and no indication that a balanced budget will ever be achieved. House Budget Committee Chairman Paul Ryan (R-WI) has said of the report: “The CBO’s report is yet another warning that we need to get spending under control. The deficit is still unsustainable.”
The reality is that we cannot continue to run deficits of this size without there being serious, long-term consequences for the economy. It is vital that we not be overly sanguine about our fiscal future and act now rather than later to balance the budget and bring responsible governance back to Washington.