Kiss that 'shrinking' budget deficit goodbye

Among the laundry list of achievements President Barack Obama touted in his State of the Union speech Tuesday was a "shrinking" budget deficit.

While that's true on its face, there's more to the story, and it's likely to become a significant headache for his successor.

Obama and his supporters are correct in reporting that a budget gap when he took office of some $1.4 trillion has been trimmed significantly. The 2014 projection was for a $506 billion shortfall, while the 2015 number comes down to $469 billion, according to the Congressional Budget Office.

"At every step, we were told our goals were misguided or too ambitious; that we would crush jobs and explode deficits. Instead, we've seen the fastest economic growth in over a decade, our deficits cut by two-thirds, a stock market that has doubled and health care inflation at its lowest rate in 50 years," Obama said.

"At this moment — with a growing economy, shrinking deficits, bustling industry and booming energy production — we have risen from recession freer to write our own future than any other nation on Earth," he added later in the speech.

The good news, however, ends soon, at least for deficit hawks.

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Absent substantial fiscal reform, obligations for retirement benefits, health care and other spending will be pushing that deficit higher and higher in the years to come, with the CBO projecting the number to approach $1 trillion again by 2024.

The 2016 number is expected to grow 18.6 percent to $556 billion, before a one-time drop to $530 billion the following year. From there, the deficit goes on a glide path higher to the point where it more than doubles the 2015 figure by 2022, the CBO estimates.

The trend will pose a policy headache for future members of Congress as well as the person who takes over the Oval Office from Obama when he exits in early 2017.

"Monthly budget updates suggest that the burgeoning U.S. expansion continues to improve the near-term fiscal outlook. Federal government revenues are outpacing last year's gait and federal discretionary spending continues to decline," economist Dana M. Peterson at Citigroup said in a report for clients.

"However, mandatory federal spending, especially for public retirement and health-care benefits, continued to expand unabated in the first three months of the fiscal year. Such rising mandatory expenditures foreshadow spiraling federal deficits and debt ahead."

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Peterson said the late-year tax and spending agreement between Obama and Congress solved nothing, adding that "media coverage of the nation's incipient fiscal challenges has been muted and measures of policy uncertainty are improving."

What lies ahead is a "fiscal firestorm" fueled by "unchecked" growth in retirement and health-care spending, Peterson said. Medicare and Medicaid spending will surge from $68 billion in the first quarter of the fiscal year to $84 billion in 2015; Social Security outlays will rise from $171 billion to $180 billion, and disability from $35.3 billion to $35.9 billion—in total, 9 percent higher.

In addition, the Affordable Care Act—Obamacare—subsidies are pegged at $5.4 billion, or more than half the total IRS spending of $9.3 billion.

"Worsening trends in mandatory expenditures on public health care and retirement entitlements point to deficit enlargement ahead. Insipient expansion of mandatory outlays continues to threaten to reverse the progress to date in narrowing the federal budget deficit and slowing the rise in public debt," Peterson said.

"Policymakers continue to focus on low-hanging fruit to reduce federal government debt and deficits, while avoiding necessary cuts to mandatory expenditures and tax reform," she added.

Peterson concluded that a "trifecta" of concerns—rising structural deficits, a growing share of debt to gross domestic product and "a dysfunctional political process"—have been "largely unaddressed" in Washington.

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Indeed, the debt remains and in fact is growing.

The federal government has a $16.6 trillion marker held by its various creditors around the world—about $2.5 trillion combined to China and Japan alone—and Obama can make no similar claim about that number "shrinking."

In fact, according to the Federal Reserve, the government ended 2008, just before Obama took office, with a total debt of $7.9 trillion—less than half its current level.

And there was no sign of debt growth slowing, as the total grew 7.2 percent in the third quarter of 2014.