OBAMA’S FISCAL LEGACY
Obama’s Fiscal Legacy
The President’s luck is about to run out—on his successor’s watch.
Congratulations to the President-elect, whoever you are, because you’re going to need it. Our deadline arrived Tuesday before we knew the election outcome, but not before we can say with confidence that President Obama is leaving his successor a large and growing federal budget problem.
That’s the message in the Congressional Budget Office’s summary, released Monday, of the fiscal year that closed in September. Though the subject barely came up in the campaign—little policy substance did—the federal fisc is once again heading for trouble. There are some lessons in this for the next President, who will quickly realize that Mr. Obama’s fiscal luck has finally run out—on his successor’s watch.
One lesson is that the days of easy deficit reduction are over. The annual deficit in 2016 rose for the first time in three years—by $148 billion to $587 billion. That’s 3.2% of GDP, up sharply from 2.5% last year. Mr. Obama has been able to ride falling defense spending from reduced military deployments overseas, but Pentagon outlays were flat in 2016. Military spending will probably have to increase in future years, no matter who wins Tuesday, to meet the growing challenges from Russia, China and Iran.
Mr. Obama will also leave town having failed over eight years to do anything to slow the booming burden of Social Security, Medicare and Medicaid. Outlays for those three programs grew by $75 billion last year, or about 4.2%. They now account for 10% of the entire U.S. economy, the highest level ever, and rising.
The President’s main contribution has been to put Medicaid on hyperspeed by expanding its coverage through ObamaCare. CBO’s budget gnomes report that Medicaid spending has climbed by nearly 40% in a mere three years—to $368 billion in 2016. That doesn’t include what the states are obliged to chip in.
Another lesson is that faster economic growth is essential to a healthier fisc. One reason for the deficit rebound in 2016 is that federal revenues increased by a mere $18 billion or less than 1%. Individual income-tax receipts were flat, while corporate income taxes fell by $44 billion or 13% as business profits sagged. This is what happens when the economy sputters at about a 1% growth rate for most of a year.
Growth that slow couldn’t keep up with spending that increased 4.5% or $166 billion in 2016. Federal outlays were 20.9% of the economy for the year, up from 20.4% in 2014. A Republican Congress has kept that figure down from the heights of the Obama-Nancy Pelosi stimulus, but it is now set to take off again as more Baby Boomers start collecting Social Security and Medicare. (Millennials, get ready to pay even higher taxes throughout your working life.)
The tragedy is that Mr. Obama spent his political capital not on growing the economy but on growing entitlements and raising costs for business via regulation. The next President needs to make faster economic growth the policy default, or every other political priority will be hard or impossible to meet. The deficit burden will get worse faster.
The final major lesson is that the next President can’t count on the continuation of low interest rates. The Federal Reserve has been Mr. Obama’s best friend not named Chief Justice John Roberts as its monetary policies have helped finance a record debt blowout at lower cost. Mr. Obama issued more Treasurys than any President in history, and the Fed bought $1.7 trillion worth from 2009-2014. That helped guarantee there wouldn’t be a shortage of demand.
This era may be ending as a new President takes office. The Fed may raise rates in December, and bond yields have been rising. Outlays for net interest on the debt increased by $23 billion or 9% in 2016, largely due to faster inflation. But inflation is still tame. If it begins to rise, the debt-financing burden will explode with more than $14 trillion of Treasury debt outstanding, much of it short-term. In January CBO said that if interest rates are 100 basis points above their projections each year for the next decade, the Treasury will have to pay an average of more than $160 billion per year.
None of this adds up to an immediate crisis, but it does illustrate the degree of President Obama’s abdication. He has been the ultimate free-lunch politician, handing out new entitlements, exploiting the post-crisis era of low rates to grow the debt, and passing the bucks to the grandkids.
Mr. Obama once quipped in a meeting with Senators, only half seriously, that he couldn’t fix entitlements on his watch because he had to leave something for his successors. Too bad he’s done nothing except make the problem worse. It’s all yours, President-elect.
