New deficit figures, new opportunities

Bloomberg

Bloomberg

We have some good news on the deficit.

The Congressional Budget Office reported yesterday:

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.

Because revenues, under current law, are projected to rise more rapidly than spending in the next two years, deficits in CBO’s baseline projections continue to shrink, falling to 2.1 percent of GDP by 2015. However, budget shortfalls are projected to increase later in the coming decade, reaching 3.5 percent of GDP in 2023, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. By comparison, the deficit averaged 3.1 percent of GDP over the past 40 years and 2.4 percent in the 40 years before fiscal year 2008, when the most recent recession began. During the next 10 years, both revenues and outlays are projected to be above their 40-year averages as a percentage of GDP . . .

This suggests an opening for both Democrats and Republicans to shift the focus away from the grand bargain discussion, which is hopelessly deadlocked. It is not that our debt is minimal or that it is not problematic. But, in the short run, we are not staring at a debt crisis. Our problem is and remains our entitlements programs, which are unsustainable. And, in the larger sense, our problem is an anemic economy with marginal job creation.

For Republicans, a new sort of grand bargain should be attractive. In exchange for whatever minimal reforms the president is willing to make on entitlements (chained CPI, means testing) the GOP should allow an uptick in domestic spending, subject to reforms and verification that the money is well spent. For example, get rid of the multiplicity of job-training programs, but put back part of the savings into those that have a high success rate. Better yet, send the money to the states in the form of STEM (science, technology, engineering and math education) grants.

Alternatively, since the results of Head Start are widely known to be minimal if not nonexistent, cap that spending and send additional funds to states with successful pre-kindergarten programs. To be even bolder, Republicans should argue that since the Department of Education has not improved education one iota, close it down, send Pell Grants to another department and convert the money into checks for middle- and low-income Americans to be used for primary or secondary education.

In other words, the CBO report gives fiscal conservatives some breathing room to collect a down payment on entitlement spending and ensure the current spending is useful. Tax reform? Unless the parties are willing to do a deal on reform of corporate taxes on a revenue-neutral basis, I don’t see that going anywhere for now.

Liberals are wrong to say we don’t have a debt problem. But conservatives should be smart enough to use the new CBO figures to their advantage. Then they can turn to other pro-growth items for which there is bipartisan support, most especially domestic energy development. Growth and the resulting uptick in revenues is the best debt reduction plan around right now.

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