Public Domain”It’s time to hit the reset button on the entire fiscal debate.”
That’s according Michael Linden, the Managing Director for Economic Policy at the liberal centre for American Progress, in his new report calling for an end to fiscal austerity in the United States.
Linden has, until now, been part of Washington’s pro-deficit reduction consensus. Just six months ago, CAP put out a report that opened like this: “There are very few things everyone in Washington can agree on these days. But the one notion that will get heads nodding across the political spectrum is that today’s fiscal policies simply are not sustainable.” Linden was one of its co-authors.
He’s still arguing for deficit reduction in the medium term, but now he’s emphasising that it can come later — now, the key objective is to make sure the government doesn’t choke off the recovery.
Since 2010, expected debt and deficits have declined sharply. The ratio of debt to GDP should stabilise in the 70s even if we repeal the sequester cuts.
That's partly because Congress and the White House have, since 2010, passed $2.5 trillion in deficit-reducing measures, excluding the sequester.
Health care inflation has also slowed down. In 2010, CBO expected health care entitlements to take up 7.2% of GDP by 2022. Now they project just 6.2%.
In light of these improvements, plus stronger-than-expected tax receipts, debt levels will stay manageable even if the sequester is repealed.
In fact, even if we repeal the sequester, deficits will be smaller than were expected in 2011 WITH the sequester in place.
The longer-term outlook looks better too. Recent improvements have shaved 30 points off the expected debt-to-GDP ratio in 2038. The CBO also assumes Congress will cut taxes and raise discretionary spending as a share of GDP in the future. If it doesn't, debt will grow even less.
When excessive deficits harm the economy, that usually shows up as upward pressure on interest rates. But 10 year Treasury rates are still extremely low, allowing the U.S. to delay fiscal austerity.
Premature efforts in other countries to slow debt growth through fiscal austerity have backfired. The UK's 2010 fiscal austerity plan not only drove the country into recession; it didn't even shrink the debt.
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