THE OBAMA DEBT LEGACY
THE WALL STREET JOURNALAnother Obama Parting Gift
His final fiscal year federal budget deficit will increase by 35%.
President Obama in the White House briefing room on June 23. PHOTO: ASSOCIATED PRESSAs President Obama ends his second term, he’s leaving plenty of political parting gifts. The latest is a 35% single-year increase in the federal budget deficit, and a rising trajectory of spending and debt as a share of the economy. Hillary Clinton’s campaign promise of more “stimulus” spending next year suddenly looks a lot more politically problematic.
That’s the story you haven’t read from the Congressional Budget Office’s latest fiscal and economic outlook released this week. For the 2016 fiscal year that ends next month, CBO now forecasts that revenues will rise by only $26 billion while outlays will increase by some $178 billion. The federal deficit will therefore rise from $438 billion to $590 billion, the biggest deficit since 2013.
The revenue shortfall reflects the decline in corporate profits and slower economic growth; the second quarter was revised down to 1.1% Friday. Meanwhile, outlays will rise 5% thanks in large part to the automatic spending drivers of Social Security, Medicare and Medicaid (which has soared thanks to ObamaCare). Net interest outlays will rise 11% this fiscal year despite historically low interest rates as overall debt continues to increase.
As a share of the national economy, debt held by the public—the kind the Treasury must repay—will increase to 76.6% this fiscal year. That’s the highest share of GDP since 1950 when the debt burden was winding down after World War II. It was 52.3% in President Obama’s first year in office, and it usually is flat or falls during an economic expansion.
No such debt reduction is on the horizon now. Thanks to ObamaCare and his refusal to reform entitlements, Mr. Obama has set the federal fisc on an even uglier path long after he’s left for a tour of the world’s great golf courses. CBO says spending will keep rising and so will debt as a share of GDP—to 77.2% in 2017, 79.3% in 2021 and 85.5% in 2026. (See the nearby chart.) All of this assumes no change in current policy and no economic recession. The odds of the latter are close to zero.
One intriguing question is whether Mr. Obama has planned it this way. One of his abiding goals has been to reorient federal spending away from defense toward more income redistribution and social spending. He has achieved that to some extent during his eight years in office, but his spending wedge will grow even more pronounced as the years go on. Budget room for defense will shrink as the entitlement state expands. He is Europeanizing the U.S. military budget.
All of this also means that his successor will have less running room for fiscal expansion. These columns put a higher priority on promoting economic growth than on deficit reduction, and we’d support a pro-growth tax cut to restore a 3% growth path. But even a reserve currency nation like the U.S. has to worry when its debt to GDP ratio heads above 80%, especially if economic growth continues to be as slow as it has been during the Obama era.
Mrs. Clinton is promising a five-year $275 billion increase in spending for roads, bridges and airports, and her chances of getting that through a Republican House diminish as the deficit grows. The tax increases she is proposing would hurt growth and further reduce federal revenues. Donald Trump is promising to spend more on roads and defense than Mrs. Clinton while cutting taxes by multiple trillions of dollars over 10 years. The deficit would restrain his ambitions too.
Mr. Obama said he wanted to be the reverse Reagan, and in both slower economic growth and an expanding government fiscal burden he has succeeded.
