Perhaps overlooked last week during the election coverage, the Congressional Budget Office (CBO) released its summary review of the state of the budget in Fiscal Year 2016, which ended on September 30. The report provides a stark reminder that the federal deficit continues to increase and that the next Congress and the Trump administration will have a challenging task on their hands to set the budget on a path to fiscal sustainability.
CBO found that the FY 2016 budget deficit was $587 billion, nearly a 34 percent hike from the FY 2015 deficit. Predictably, the increase in the deficit was driven largely by an increase in spending; spending grew by $166 billion from FY 2015, or about 5 percent, while revenues grew by only $18 billion, less than a 1 percent increase from FY 2015. A majority of the spending increase was driven by the big three entitlement programs; Social Security, Medicare, and Medicaid. CBO noted that the combined spending for these “three programs were equal to 48 percent of federal spending and 10.0 percent of GDP in 2016, the highest shares ever recorded.” Net interest payments on the national debt rose by $23 billion (9 percent). Irresponsible spending is what many have come to expect from Washington, but as policymakers punt on long-term problems, taxpayers will eventually be left to face the consequences of a ballooning debt.
Republicans in Congress and the President-elect have called to reduce taxes to stimulate the economy, but spending reform must come along with this. As the report shows, the federal government spent at a rate of nearly 21 percent of GDP in FY 2016, 0.6 percent more than in FY 2015. On average since World War II, government spending has comprised 19.3 percent of GDP, while revenues have come in at an average rate of 17.2 percent. This chronic over-spending to address short-term needs has long-term consequences: the larger the deficit grows, the higher interest rates and the cost of servicing the national debt will become.
Congress and the incoming Administration must break this habit while at the same time implementing pro-growth measures.The economy has seen ten straight years of growth below 3 percent (average annual growth from 1790-2000 was 3.79 percent). The solutions lie in fundamental tax reform and regulatory relief. This would lead to a significant reduction of the federal government’s influence in the economic sphere to allow competition and reduce cronyism. And we can’t emphasize it enough but spending restraint is needed. Options such as Trump’s support for a modified Penny Plan should be considered along with other proposals to rein in outlays. Without these changes, Americans will have to get used to many more dour CBO reports such as this one.