The latest report from the Congressional Budget Office has something for everyone to have mixed feelings about. In the short term, the outlook for the budget deficit continues to look good, but by 2018, it will start growing again, fueled in large measure by growth in mandated spending in retirement and health care.
President Barack Obama can continue to brag about economic growth and the decline in the federal deficit, which is currently estimated at $468 billion this year. Incidentally, that's actually slightly less than the 50-year average as a percentage of gross domestic product. It's also nearly $200 billion less than it was just two years ago.
But the problem that plagues Washington, much as budget imbalances have haunted Annapolis on a much smaller scale, is that projected tax revenues and spending are not keeping pace. This structural deficit has been offset (perhaps masked might be a better description) to some degree by economic growth, reductions in discretionary spending, Federal Reserve stimulus policies that have pumped more money into the economy and, most recently, reduced energy prices, but the underlying problem isn't going away.
The only real solution would be what Congress and the White House have not been able to produce, which is a grand bargain that would address both tax rates and costly entitlements and put both on a more sustainable path. The irony, of course, is that reductions in the deficit have lessened the sense of urgency over federal deficits and debt.
Yet if nothing is done, deficits would eventually worsen, and while a return to the record levels at the beginning of Mr. Obama's first term isn't expected, the CBO does see the national debt rising to 79 percent of GDP by 2025. The goal ought to be to make corrections now rather than wait until circumstances become more dire.
The president has talked about closing tax loopholes and shifting more of the tax burden to wealthier Americans. That would be helpful. But so would bringing balance to programs like Medicaid and Social Security by adjustments in benefits and payroll deductions. Simply cutting the usual suspects within the discretionary portion of the budget like the U.S. Internal Revenue Service won't do much good. And in the case of the IRS, it's bound to make matters worse, as slashing the money set aside for tax enforcement inevitably reduces tax revenue.
This isn't rocket science. Gov. Larry Hogan is quickly discovering that you can't just show up in the State House and cut taxes — despite the 40-odd examples of tax and fee increases he railed against as a candidate for governor. His budget-balancing efforts have so far not only relied on broad reductions in spending but also on keeping in place — at least for now — the very taxes he campaigned against. Once again, it's the fiscal triumph of moderation.
Still, only a wild-eyed optimist would predict that Republicans and Democrats in the nation's capital would embrace budgetary compromise at this point. They certainly haven't in the past, and today's circumstances are clearly less urgent than they were a few years ago when the "sequester" plan for across-the-board spending reductions was reluctantly adopted (and then set aside by a two-year budget deal that expires this fall).
There are alternatives, however. One would be to adopt some form of immigration reform that would increase economic growth while another would be to move forward with pending trade agreements and updates to patent law. There might even be examples of political gridlock proving helpful by preventing costly new spending or draconian austerity programs.
Perhaps the best thing that can be said of the CBO report is that it's unlikely to cause the deficit to be a front-burner issue on the campaign trail between now and 2016. As a result, the next president likely won't have to commit himself or herself to some unrealistic policy commitments — whether it's only cutting spending or only raising taxes. The less absolutist and polarized the nation's leadership, the better the chance for rational economic policy — or at least that's the theory.
Oh, and one more point. One of the factors that has recently improved the outlook for the deficit is a slow-down in health insurance spending caused by the Affordable Care Act. Yet another example of how the ACA isn't the boogeyman its opponents continue to claim.