Another
Obama Parting Gift, His final fiscal year
federal budget deficit will increase by 35%. 8/23/16
As President Obama
ends his second term, he’s leaving plenty of political parting gifts. The
latest is a 35% single-year increase in the federal budget deficit, and a
rising trajectory of spending and debt as a share of the economy. Hillary Clinton’s campaign promise of more “stimulus” spending next year
suddenly looks a lot more politically problematic.
That’s the story you
haven’t read from the Congressional Budget Office’s latest fiscal and economic
outlook released this week. For the 2016 fiscal year that ends next month, CBO
now forecasts that revenues will rise by only $26 billion while outlays will
increase by some $178 billion. The federal deficit will therefore rise from
$438 billion to $590 billion, the biggest deficit since 2013.
The revenue shortfall
reflects the decline in corporate profits and slower economic growth; the
second quarter was revised down to 1.1% Friday. Meanwhile, outlays will rise 5%
thanks in large part to the automatic spending drivers of Social Security,
Medicare and Medicaid (which has soared thanks to ObamaCare). Net interest
outlays will rise 11% this fiscal year despite historically low interest rates
as overall debt continues to increase.
As a share of the
national economy, debt held by the public—the kind the Treasury must repay—will
increase to 76.6% this fiscal year. That’s the highest share of GDP since 1950
when the debt burden was winding down after World War II. It was 52.3% in
President Obama’s first year in office, and it usually is flat or falls during
an economic expansion.
No such debt reduction
is on the horizon now. Thanks to ObamaCare and his refusal to reform
entitlements, Mr. Obama has set the federal fisc on an even uglier path long after
he’s left for a tour of the world’s great golf courses. CBO says spending will
keep rising and so will debt as a share of GDP—to 77.2% in 2017, 79.3% in 2021
and 85.5% in 2026. (See the nearby chart.) All of this assumes no change in
current policy and no economic recession. The odds of the latter are close to
zero.
One intriguing
question is whether Mr. Obama has planned it this way. One of his abiding goals
has been to reorient federal spending away from defense toward more income
redistribution and social spending. He has achieved that to some extent during
his eight years in office, but his spending wedge will grow even more
pronounced as the years go on. Budget room for defense will shrink as the
entitlement state expands. He is Europeanizing the U.S. military budget.
All of this also means
that his successor will have less running room for fiscal expansion. These
columns put a higher priority on promoting economic growth than on deficit
reduction, and we’d support a pro-growth tax cut to restore a 3% growth path.
But even a reserve currency nation like the U.S. has to worry when its debt to
GDP ratio heads above 80%, especially if economic growth continues to be as
slow as it has been during the Obama era.
Mrs. Clinton is
promising a five-year $275 billion increase in spending for roads, bridges and
airports, and her chances of getting that through a Republican House diminish
as the deficit grows. The tax increases she is proposing would hurt growth and
further reduce federal revenues. Donald
Trump is promising to spend
more on roads and defense than Mrs. Clinton while cutting taxes by multiple
trillions of dollars over 10 years. The deficit would restrain his ambitions
too.
Mr. Obama said he
wanted to be the reverse Reagan, and in both slower economic growth and an
expanding government fiscal burden he has succeeded.
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