In a speech marking the fifth anniversary of the financial crisis, President Obama claims credit for cutting the deficit in half. But one reason it fell so fast is that it shot up so high in the first place.
President Obama on Monday boasted that during his time in office the US budget deficit has been cut in half. In remarks commemorating the fifth anniversary of the onset of the financial crisis of 2008, Mr. Obama cited the deficit reduction as a sign of progress for an economy that’s still struggling toward full recovery.
“Our deficits are now falling at the fastest rate since the end of World War II. I want to repeat that. Our deficits are going down faster than anytime since before I was born,” said Obama.
When you put it that way it sounds pretty impressive, doesn’t it? But is that true?
Strictly speaking, yes. The deficit is falling as rapidly as it has in decades. Consider the figures for this year alone: Last week the Congressional Budget Office (CBO) reported that, through the first 11 months of fiscal 2013, the budget deficit was down 35 percent from the comparable period of 2012.
That’s a pretty steep decline.
“The federal budget deficit has fallen faster than we expected a few years ago,” wrote CBO director Doug Elmendorf on his blog.
But as Mr. Elmendorf and other experts point out, one of the reasons it is falling is because it shot up so high in the first place. As the financial crisis devastated the economy, tax revenues fell. Spending on unemployment insurance and other government recovery programs rose. In 2008, the deficit was about $458 billion. In 2009, it rocketed up to $1.4 trillion. It stayed above the trillion-dollar mark for 2010 through 2012.
As the economy has gradually recovered, those cyclical expenses have receded. Tax revenues have risen modestly along with the slowly rising gross domestic product. The FY 2013 shortfall should end up at around $642 billion, according to the CBO.
The sequestration automatic budget cuts have also cut spending. However, the January "fiscal cliff" deal, which locked in the Bush-era tax cuts largely offset these savings, according to the Concord Coalition, a budget watchdog group.
“This year’s lower deficit can be largely attributed to short-term economic factors rather than systemic reforms in the federal budget,” writes the Concord Coalition’s Steve Winn.
Looking ahead, CBO now projects that the deficit will continue to narrow until fiscal 2016, when it will again begin widening, as more and more baby boomers retire and become eligible for Medicare and Social Security.
That means the nation’s fiscal problems are far from solved. The core challenge involves trimming federal health-care costs enough to bend the curve of ever-rising Medicare and Medicaid expense.
“The fundamental federal budgetary challenge has hardly been addressed,” writes CBO chief Elmendorf.
Nor does it do anything about the debt piled up during the recession’s worst years. The debt is the nation’s accumulated red ink; the deficit is the amount of red ink Uncle Sam runs up each year.
When the president proclaims that the deficit is shrinking at the fastest rate in decades, that’s the same as saying that the speed at which the nation is rolling backward has decreased dramatically, wrote Keith Hennessey, director of the National Economic Council under President Bush, in May.
“That is not something you should boast about. You’re supposed to boast when things are getting better, not when they’re getting worse more slowly,” wrote Mr. Hennessey.