Update: Falling Deficit is Not a Sign of Fiscal Sustainability

With the Treasury Department's year-end Monthly Treasury Statement having been released, we have revised last week's report today showing what the 2014 totals mean for the budget. The FY 2014 budget deficit totaled $483 billion, according to Treasury's statement. Although this is nearly 30 percent below the FY 2013 deficit and two-thirds below the 2009 peak, the country remains on an unsustainable fiscal path.

^Source: CBO

Last week the Congressional Budget Office (CBO) projected the FY 2014 budget deficit at $486 billion.  While the CBO works closely with Treasury to come up with their estimates, CBO's report was preliminary. Treasury's statement, which is considered final, shows revenues and outlays in FY 2014 that were $8 billion and $5 billion higher, respectively, than CBO's estimates. The result is a FY 2014 deficit of $483 billion, which is $3 billion lower than last week's CBO projection.

Since the deficit numbers are very similar, the same points we made in the original paper still apply, namely:

• Annual deficits have fallen substantially over the past 5 years for a number of reasons, mainly due to an increase in revenue due to the economic recovery but also the reversal of stimulus during the Great Recession, small decreases in defense spending, and slow growth in several other areas.
• The 66 percent fall in deficits over the past 5 years, however, follows an almost 800 percent increase that brought deficits to record-high levels.
• Even as deficits have fallen, debt has continued to rise, more than doubling as a percent of GDP since 2007 to record levels not seen other than during a brief period around World War II.
• Most importantly, this improving deficit situation will not last. Deficits and debt are projected to rise over the next decade and beyond, with trillion-dollar deficits returning by 2025 and debt exceeding the size of the economy before 2040, and as soon as 2030.

Thus, the recent fall in deficits is not a sign of fiscal sustainability. It mainly reflects a return closer to normal from the extraordinarily high deficits of the earlier part of the decade (with the help of some deficit reduction). Deficits and debt will rise rapidly over the long term even in the absence of a recession like the one we saw at the end of last decade. Falling near-term deficits should not breed complacency among policymakers; rather, the long-term outlook should be a cause for action.

Click here to read the full paper.