WILLIAM GALSTON MARCH 9, 2010
This past Friday, without much fanfare, CBO submitted its analysis of President Obama’s proposed FY 2011 budget. The bottom line is worse than we thought. Despite sustained economic recovery, the budget deficit under the president’s proposal never falls below 4 percent of GDP over the next decade and rises to 5.6 percent by 2020. The aggregate deficit during that period is $9.761 trillion—close to $1 trillion each year on average. Not surprisingly, debt held by the public rises steadily and reaches 90 percent of GDP by 2020. If the historical study of financial crises conducted by Kenneth Rogoff and Carmen Reinhart is correct, that level of debt is enough to reduce our long-tem growth prospects by about a percentage point each year.
Unfortunately, the much-ballyhooed alternative to Obama’s budget—Representative Paul Ryan’s “Roadmap for America’s Future”—is equally flawed. Despite drastic reductions in both discretionary domestic spending and entitlement programs whose wisdom and political viability is questionable at best, the roadmap contemplates budget deficits of 5 percent as late as 2037 and produces its first balanced budget in 2063. Not surprisingly, it runs the debt up to 100 percent of GDP before the curve turns down. And these mediocre results rest on a leap of faith—namely, that Ryan’s proposed tax reforms would actually produce revenues equal to 19 percent of GDP, in line with CBO’s assessment of current policy. (The CBO analysis notes dryly that while the proposal “would make significant changes to the tax system … as specified by your staff, for this analysis total tax revenues are assumed to equal those under CBO’s alternative fiscal scenario.”)
Ryan’s roadmap does have one incontestable virtue: It demonstrates that even with draconian spending cuts, there’s no way of achieving fiscal sustainability during the next three decades without additional revenues. And the president’s budget has the mirror-image virtue: Even with health reform and tax increases for upper-income Americans, spending shoots ahead much faster than politically feasible and economically prudent revenues possibly could.
In her testimony before the Senate Budget Committee last month, former CBO director Alice Rivlin stated that “the widening gap between projected spending and projected revenues is too large to be closed by either spending cuts or revenue increases alone.” As we can see, that’s not just her opinion; it’s a political fact. How long will it take for our reality-denying political system to catch up to it?