CBO director: falling deficit gives breathing room, not all-clear signal

The federal deficit is falling, but could begin to nudge upward again in 2015, according to CBO data. That means trimming the deficit is important but not urgent, the CBO chief said Wednesday.

Michael Bonfigli/The Christian Science Monitor
Congressional Budget Office (CBO) Director Douglas Elmendorf speaks at a Monitor-sponsored breakfast for reporters in Washington, D.C., Wednesday, Sept. 18, 2013.

Forecasts showing the federal budget deficit will decline for the next several years relative to the size of the economy gives the US “some breathing room” to deal with its fiscal problems, says Congressional Budget Office Director Douglas Elmendorf.

But Mr. Elmendorf, head of the nonpartisan office that provides budget information to lawmakers, added that “it would be a mistake to take that as a sort of all-clear signal” on the need to deal with the nation’s budgetary challenges. 

The CBO released its Long Term Budget Outlook Tuesday. It predicted that the government deficit in the budget year ending Sept. 30 will be $642 billion compared with more than $1 trillion in the previous year. The deficit this year is expected to be 4.0 percent of gross domestic product – less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.   

With revenues expected to rise more rapidly than spending during the next two years, the deficit is projected to fall to 2.1 percent of GDP by 2015 before beginning to climb again as a share of the economy. Key factors in the expected increase in the deficit after 2015, the CBO says, are the pressures of an aging population, rising health-care costs, an expansion of subsidies for health insurance, and growing interest payments on the federal debt.

At a breakfast sponsored by the Monitor, Mr. Elmendorf said “the federal budget is a very important problem but not necessarily an urgent one in the sense that the interest rates that the federal government is currently paying are quite low. The deficit is falling now.” 

But the Princeton and Harvard-trained economist added that, “one of the most important pieces of advice to people in their personal lives and people running their own affairs is not to neglect the important problems while chasing after the urgent ones.” He said that one goal of the CBO’s latest report is to help members of Congress “look ahead and address fiscal problems over a longer term.”

It would make sense for Congress to devise a strategy for dealing with the nation’s long-term budget issues now even if economic conditions made it wise to wait to implement spending and tax changes. “It is hard to think of a disadvantage to deciding what to do soon," he said.    

But a long-term deficit-reduction plan is not on the horizon at the moment. The CBO director’s comments came as Congress is struggling to find a path for extending government funding now slated to expire Sept. 30 and also to raise the government’s borrowing authority. At a press briefing Tuesday, Elmendorf said the government would run out of cash “sometime between late October and mid-November” if the debt ceiling were not raised.

There is a tradeoff in any action to reduce the deficit, Elmendorf noted. “The more slowly those changes are phased in, then the more debt that accumulates and the sharper the changes that will be needed in the future. On the other hand, the more quickly those changes are phased in, the less time people have to plan and adjust and the worse it is for this current economic recovery.” 

A key consideration in deficit-cutting action is making sure the Federal Reserve can use monetary policy to offset the negative impact on the economy of tax and spending actions. “The negative short-term effects of raising taxes or cutting spending in order to reduce deficits are particularly acute under the current conditions where the Federal Reserve has pushed interest rates down to zero,” Elmendorf said. 

He noted that “reductions in deficits a few years from now by which point interest rates will have climbed back from zero … under those circumstances the Federal Reserve could then adjust its policy in a way that would offset some of the short term costs” of changes in fiscal policy.

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