The federal budget deficit will increase for the first time since President Obama's first year in office, and many in Washington are trying to cause a panic about it. The deficit will grow from $439 billion last year to $544 billion next year, according to a Congressional Budget Office report released Tuesday. The primary reason is the extenders compromise passed in December, but those who are feigning anger either don't understand how extenders have worked for decades or are purposely crying wolf.
The Obama administration has presided over the largest deficits in U.S. history, but it has been a declining problem. In 2009, the president's first year in office, a bloated stimulus package and the Great Recession contributed to a federal deficit of over $1.4 trillion. The deficit would remain over $1 trillion for 2010 through 2012, before falling to $680 billion in 2013. For some perspective, Democrats painted President George W. Bush as irresponsible when his administration's largest deficit was $459 billion in 2008 (the year of the recession).
The Tea Party movement's growth was at least partially fueled by anger over the deficit problem, and after the decisive Republican electoral victories in 2010, the president became much more sensitive about the issue. So each year the deficit dropped, the White House would tout the new numbers. And the passage of ATRA in January 2013 was hailed as a major success in keeping the federal government on a sustainable course, which it really isn't on, according to most economists and long-term forecasts.
So the new CBO report is something of a bitter pill for Obama. But the president isn't to blame, according to some observers. In fact, the CBO itself points out that about half the cost of rising deficits is from tax legislation enacted since August 2015. The biggest chunk, of course, comes from the extenders compromise, which made some expiring (or expired) tax provisions permanent. That hurts the budget outlook, which always assumed expiring tax provisions would stay expired.
But extenders have never been allowed to stay expired. They are always renewed -- sometimes late and sometimes retroactively, but without significant exception. And that makes the CBO's observations about extenders deceptive. It also highlights why previous CBO projections about the deficit were always too rosy. By assuming that extenders would go away once they expired, budget forecasters were always showing too much revenue. If the CBO had used a model that assumed Congress would continually renew popular provisions like the research credit, the deduction for state and local sales taxes, and bonus depreciation, the numbers would look almost identical to what the January 19 report is showing now.
So deficit hawks shouldn't be all that shocked about the latest numbers. Nothing has changed. It's just that we are finally seeing forecasts that take into account the practical realities of tax politics in Washington. By making some extenders permanent, Congress has finally allowed the CBO to paint a more realistic portrait of the federal deficit and the long-term budget outlook.