$2.2 Trillion is the New $2.4 Trillion
In February, we wrote the paper "Our Debt Problems Are Far From Solved," laying out the case for putting debt on a clear downward path as a percent of GDP with $2.4 trillion of additional savings. CBO's improved budget projections have prompted a new round of discussion of what should be the right direction for the budget. With that in mind, we have updated our estimates and written a new paper "Our Debt Problems Are Still Far From Solved." In light of the latest projections, we now find that $2.2 trillion of deficit reduction is necessary to put the debt on a clear downward path. That number declines to $1.6 trillion if the sequester stays in place through 2021 as scheduled.
Some might wonder why the minimum savings path, which was previously $2.4 trillion, only fell a little bit given the $900+ billion improvement in our budget projections through 2023. Essentially, this apparent disparity has to do with the nature of our goal to put debt on a clear downward path. In other words, our primary concern is the trajectory of the debt, whereas recent improvements, a main part of which are short-term improvements, have reduced the level.
Debt under February and May CRFB Realistic and Minimum Savings Path (Percent of GDP)
As the above graph shows clearly, while both debt projections and our minimum path are lower now than in February, their slope and therefore trajectory is quite similar. As a result, the total amount of deficit reduction to ensure a clear downward path would be $2.2 trillion. In Appendix III of our paper, we show that the full $2.2 trillion of deficit reduction is necessary to ensure debt is declining under a most likely scenario, and stands up to certain robustness tests assuming growth is slower, deficit reduction phases in faster, or additional deficit-increasing measures are passed.
By contrast, enacting the $1.5 trillion necessary to hit the old minimum path's 2023 debt level would result in slightly rising debt levels under our base case, and more quickly rising debt levels under the robustness tests. A faster phase-in results in a slightly upward path while the slower growth and fiscal irresponsibility scenarios result in clear upward paths.
Robustness Test of $1.5 Trillion of Savings (Debt as Percent of GDP)
The improvement in the budget projections is a welcome one, but it does not fundamentally change the long-term picture of the budget. Lawmakers cannot rest on their laurels because waiting to make changes may result in more abrupt and less targeted policies in the future. Instead, they should enact changes now that take effect gradually to bring our debt down as a share of the economy in a more intelligent and economically beneficial manner.
Click here to read the new paper.