The Congressional Budget Office (CBO) released its latest budget projections today, which show that the U.S. has made substantial progress towards getting its deficit and debt under control. However, the flip side of that reality is that CBO projects economic growth will be sluggish for the next several years, meaning that unemployment will only come down slowly. Here are the four biggest takeaways from the report:
1. The deficit has been reduced by a lot. As Center for American Progress Director of Tax and Budget Policy Michael Linden noted, in August 2010, CBO’s “alternative fiscal scenario” projected a deficit in 2020 of 7.8 percent of GDP. Now it projects that deficit will be 4.7 percent of GDP. The difference between the projected 2013–2020 deficit in 2010 and that same projection today adds up to $4.5 trillion in deficit reduction.
2. The debt is stabilized. Thanks to the fiscal cliff deal and previous budget agreements, most of the country’s debt problem is solved. The CBO’s report shows debt will now peak at 77.7 percent of GDP in 2014, then drop to 73.1 percent in 2018, then rise back to 76 percent in 2022. (See graph below.) According to the Economic Policy Institute, flattening out that second rise from 2018 to 2022 will only require $670 billion in additional deficit reduction — $580 billion in actual policy savings, plus $90 billion in resulting interest savings. That’s less than half the $1.5 trillion in additional deficit reduction President Obama is calling for.
3. Austerity is killing the recovery. The CBO anticipates that economic growth will be slow this year, which “reflects a combination of ongoing improvement in underlying economic factors and fiscal tightening that has already begun or is scheduled to occur — including the expiration of a 2 percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain thresholds, and scheduled automatic reductions in federal spending.” Large austerity efforts in Europe have been stifling economic growth and causing continued economic contractions.
4. Jobs aren’t coming back fast. Due to a pronounced output gap — the gap between what the economy is producing and what it could be producing (shown below) — unemployment will remain elevated for several years. CBO projects that the unemployment rate “falls from 8.0 percent in the fourth quarter of 2013 to 6.8 percent in the fourth quarter of 2015 and then declines gradually to 5.5 percent in the fourth quarter of 2018.”
The report clearly shows that, despite the ongoing deficit hysteria in Washington, the far more pressing problem is growth and jobs.