Budget Deficit Mania And The Congressional Budget Office

The Peter Peterson gang has been hard at work lately trying to get people worried about the budget deficit. After all, with interest payments on the debt as a share of GDP at a post-war low and an interest rate on long-term Treasury bonds of almost 2.0 percent, things look pretty bleak. (That’s sarcasm.)

But the Washington deficit hawks (great name for a NFL team) have never let the real world interfere with their ranting about deficits, which invariably turn to the need to cut Social Security and Medicare. Unfortunately, they are getting some support in this effort from the folks at the Congressional Budget Office (CBO). 

While the CBO forecasts don’t look exactly like the sky is falling end of the world stuff, they do show that the debt and deficit will both rise as a share of GDP. And, if the debt is rising as a share of GDP, and we never do anything, then at some point it will do real damage to the economy.

Most of this logic is beyond silly in a context where the economy is still far below its full employment level of output. Debt or deficits can only be an issue when the economy is close to full employment, until that point the only problem with deficits is that they are not large enough. Cutting deficits when the economy is below full employment means slowing growth and throwing people out of work.

But that is not the point I wanted to make. I thought it was worth showing why CBO is projecting that deficits will rise over the next decade. If we turn to Table 1-2 of the latest CBO Budget and Economic Outlook, we find that the deficit for this year is projected to be 2.9 percent of GDP. This should leave the ratio of debt-to-GDP more or less constant, depending on the exact growth and inflation numbers for the year. 

However if we look out to 2026, the end of the CBO projection period, the deficit is projected to be 4.9 percent of GDP. At that level, the debt-to-GDP ratio would be rising, and we would be down the road toward higher interest payments leading to higher deficits, leading to higher interest payments and pretty soon, Zimbabwe.