In releasing his proposed federal budget, President Obama can point to signs of fiscal progress: falling deficits, a prediction for even smaller deficits in 10 years, and a decline in medical inflation that’s helping to make it all happen. But don’t read that as an all-clear signal on the national debt and the danger it poses to the US economy.
If White House officials are setting their budget proposal in an upbeat context, it’s partly because they’re making the case against further tightening of federal spending in the near term. Their assessment: We’ve brought deficits down as promised, and now it’s time to focus on some investments, such as transportation and technology networks, to strengthen US job creation.
The Obama team doesn’t deny that more needs to be done, in the long term, to bring the national debt under control – or that, in an ideal world, it would be best to reform big entitlement programs such as Medicare and Social Security sooner rather than later.
But the politics of a congressional election year and of sharp divides between Mr. Obama and the Republican-led House of Representatives has sidelined the idea of a “grand bargain” on fiscal policy.
Here’s the upbeat news and the more sobering news that underlies the Obama budget released Tuesday.
First the good news:
• The federal budget deficit is forecast to fall. Red ink will be about $564 billion in the 2015 fiscal year that starts in October, under the president's proposal. That’s down from an estimated $649 billion deficit for the current fiscal year, and from $680 billion in 2013.
• Health-care costs are not rising as steeply. That's one big reason the deficit outlook is improving, given that the federal government is a major buyer of health-care services. A slower rate of growth in health-care costs has caused the Congressional Budget Office, in its role as a central scorekeeper of federal budget matters, to mark down its forecasts for future medical inflation. The CBO has marked down its cost estimate for major federal health programs in 2020 by 10 to 15 percent from its prediction in 2009.
• The Obama proposal seeks further gains against deficits. Its goal is an annual deficit that equals 1.6 percent of America’s gross domestic product (GDP) by 2024. That’s much smaller than what the CBO has forecast for the deficit that year: 4 percent of GDP. The difference in the White House plan: It assumes that immigration reform will pass (with substantial economic benefits), and that some yet-to-be-approved tax and health-care reforms will improve federal finances.
Now the sobering notes:
• The long-term outlook on the national debt remains daunting. The Obama administration pledges to put the national debt (accumulated annual deficits, on which interest is owed) “on a declining path” after 2015, but there's a difference between charting a bit of decline through 2024 and doing so permanently. And the “declining path” vision for the next decade hinges on legislation, notably immigration reform and some tax hikes on the rich, for which passage is uncertain.
• Cost relief for health-care services may not last. Historically, slow periods for health costs have been followed by cycles of faster medical inflation, notes CBO Director Douglas Elmendorf. Federal health spending, moreover, is projected to grow rapidly as a share of GDP, because America's population is aging, federal support for insurance coverage (Obama’s Affordable Care Act) is expanding, and health-care costs tend to outstrip the general inflation rate.
• The public debt is historically high, at more than 72 percent of GDP. Levels were typically below 40 percent since the early 1960s. Obama’s budget doesn’t bring it back near those earlier levels, leaving it at 69 percent of GDP in 2024.
So, yes, Obama can point to some good news. Thanks to a reviving US economy, budgetary restraints Congress has imposed since 2011, and a cooling of medical inflation, the deficit picture is improving. The White House budget also shows how potential steps such as immigration reform could brighten the outlook still further.
But in the longer run, many economists say reforms to Social Security and Medicare – beyond anything proposed in the president’s budget – will be needed to restrain a potentially dangerous build-up in debt.