Orszag: Forget About Balancing the Budget

Does the Obama administration ever plan to balance the budget? Apparently not. In a speech at New York University, Peter Orszag, head of the Office of Management and Budget, suggested that the administration's goal was to reduce the deficit to a "fiscally sustainable level," which he said is "roughly 3 percent" of gross domestic product (GDP). That would be much lower than the deficit of $1.4 trillion for fiscal 2009, which ended in September and totaled $1.4 trillion. But it would still be a lot of money, about $420 billion annually in today's dollars.

The idea behind keeping the deficit to a "fiscally sustainable level" is to stabilize the outstanding federal debt as a share of GDP. In 2008, the federal debt held by the public was $5.8 trillion, or 41 percent of GDP. When the Congressional Budget Office estimated the prospective Obama budgets in June, it projected that there would be continuous deficits for the next decade and that by 2019 the federal debt would reach $17.1 trillion, about 82 percent of estimated GDP. Other estimates have put the debt-to-GDP ratio even higher. The annual deficits during this decade would average more than 5 percent of GDP, the CBO said. (The federal debt represents all the money borrowed to cover annual deficits.) In his speech, Orszag conceded that present deficit projections are "well above" fiscally sustainable levels. Orszag didn't say when the administration would start curbing the deficits, except to indicate that the process might start once the economic recovery seemed well established. At that point, large deficits—rather than stimulating the economy—might do the opposite, he said. With private borrowing depressed by the deep recession, today's huge deficits haven't pushed up interest rates, but when the economy revives "the federal government's borrowing...will be competing more directly with private-sector borrowers" and might increase interest rates. Similarly, Orszag gave no hint of how the administration might close future deficits—whether through spending cuts or tax increases and of what type. Nor did he explain why keeping the deficits to "fiscally sustainable" levels was superior to balancing the budget, though it would certainly be easier politically.

Finally, it not clear whether Orszag's goal of deficit reduction would actually be adequate to stabilize the debt-to-GDP ratio. To do that, the economy would have to grow at 3 percent or more a year in the future—possible, but not guaranteed—and the debt-to-GDP ratio would have to decline in some years, because future recessions and emergencies almost inevitably bloat deficits and require more borrowing.