Here's the bad news: The federal budget deficit is gaping wide, and Congress can't get anything done to fix it.
The good news: Not getting anything done is one of the surest ways to fix it.
On Tuesday, the Congressional Budget Office released a 10-year budget forecast that makes one thing clear. If Congress does nothing -- literally, nothing -- and lets all laws play out as they're currently written in the books, the budget deficit over the next decade virtually disappears.
But that would mean allowing three things to happen:
- An expiration of the 2001/2003 tax cuts, currently scheduled to end in 2013.
- A massive cut in Medicare payments to doctors, in place since 1997, but currently avoided through temporary patches (the so-called "doc-fix").
- The $1.2 trillion in automatic spending cuts mandated by last summer's debt ceiling deal must actually occur.
That scenario, the do-nothing plan CBO calls "baseline," shrinks the budget deficit substantially.
A more realistic scenario it calls the "alternative" assumes the tax cuts will be extended, doc-fix will continue to be patched up, and Congress' own self-imposed "mandatory" spending cuts will be ignored.
The difference between the two scenarios is night and day:
This chart speaks volumes about our current deficit. The biggest budget risks are not the policies currently in place. It's the popular policies set to expire but likely to be extended -- low taxes and generous entitlements -- that pose all the danger over the coming decade.
Since 1950, the federal government has spent an average of 20% of gross domestic product, and pulled in taxes equal to 18% of GDP. In 2011, both sides of that equation lurched: spending came in at 25% of GDP and taxes were a record-low 14.4% of GDP.
Under CBO's baseline scenario, taxes from 2013-2022 would average 20.4% of GDP, and spending about 22% of GDP. The average annual deficit under this scenario -- 1.5% of GDP -- is perfectly manageable, and since it's likely lower than the rate of inflation, debt as a percentage of GDP would decline.
Under the more realistic alternative scenario, spending would equal 23.4% of GDP over the next decade, and taxes 17.9%. That annual deficit -- 5.5% -- would cause debt as a percentage of GDP to rise from 73% today to 94% in 2022.
So here we have two scenarios.
One could solve the budget problem without Congress having to lift a finger, but would raise taxes on nearly everyone (unpopular) and cut Medicare so savagely that many doctors would stop accepting it (unreasonable). Realistically, this scenario has no chance of occurring. Both President Barack Obama and any potential Republican presidential candidates have vowed to extend the 2001/2003 tax cuts, at least for those making under $250,000 a year.
The other scenario is likely to happen because it gives voters what they want, but keeps the trajectory of national debt on a dangerous path. As the CBO warns, the alternative scenario "will increase federal debt to unsupportable levels." That's putting it lightly.
These are important distinctions to keep in mind. There's often a notion that our budget deficit is high because Congress can't agree on ways to shrink it. But that's not quite right. Both Congress and the president seem to agree on a couple of things: taxes for most Americans should remain fairly low and entitlement benefits should remain sacred.
Yet that agreement can -- and will -- singlehandedly keep the deficit gaping. As David Leonhardt of The New York Times put it: "As countries become richer, their citizens tend to want more public services, be it a strong military or a decent safety net in retirement. This country is no exception. Yet our political culture is an exception. It has made most tax increases, even to pay for benefits people want, unthinkable."
Doing nothing has never looked so attractive.
Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.