The new budget and economic outlook released by the Congressional Budget Office addresses the biggest shortcomings in previous projections. And the more realistic picture it paints is moderately encouraging: The deficit dips as low as 2.4 percent of gross domestic product in 2015 before gradually rising to 3.8 percent by 2023.
Unfortunately, just 15 minutes after the CBO report came out, President Barack Obama delivered a budget statement that, in highlighting the fiscal paralysis in Congress, was simply depressing. Instead of attacking unemployment and our long-term fiscal imbalances with a combination of upfront stimulus and delayed austerity measures, we're likely to wind up with the federal budget equivalent of living paycheck to paycheck, with rolling two- or three-month budget deals.
First, let's get back to the good news. CBO's projections increasingly reflect the slowdown in health-care costs that I've highlighted in many previous columns. As CBO writes, "In recent years, health care spending has grown much more slowly both nationally and for federal programs than historical rates would have indicated." In response, the agency has lowered its projections for Medicaid and Medicare spending.
These revisions are significant, given how enormous a role Medicare and Medicaid play in the U.S.'s long-term fiscal imbalance. Consider that, five years ago, CBO projected Medicare spending in 2018 would amount to 3.9 percent of GDP. Now, in part because CBO assumes slower cost growth, it puts 2018 Medicare spending at 3.5 percent of GDP. That difference has about the same impact on the budget as did the upper-income tax cuts that expired as part of the fiscal deal reached on Jan. 1.