The Most Important Graph on the Deficit

By Mike Konczal |

Another friendly reminder, especially as you are deluged by pundit commentary about the budget, debt, and deficit, that there’s one graphic to keep in mind about the current budget situation. From CBO:

As you can see, in 2009 our country goes into a deep recession. As a response, automatic stabilizers kick in, increasing spending through things like unemployment insurance and food stamps. Meanwhile receipts fall, as there is less economic activity and jobs that generate tax revenue, and taxes are cut further as a stimulus measure. This is not only natural, but to push back against it would have made the economy worse. That, in turn, would probably have blown out the deficit more.

The deficit is just the difference between the two lines. As the economy slowly recovers, spending decreases and tax revenues increases. We already see this happening in the CBO graphic. From the Budget Control Act there will be less spending, and from the fiscal cliff there will be more revenue. If anything, we should be worried that gap is closing too quickly, suffocating the recovery as it starts to gain strength. But the gap is still decreasing. As many people noted, the gap is closing at record-high rates.
There are long-term challenges driven by health care spending. Our course of action is to see if the cost control mechanisms in Obamacare work, and go from there if they don’t, which I think is the right course. Certainly, after all the political pain of “cutting Medicare” and passing Obamacare, they’d be insane not to see how it works. And it is possible it is already working, with Medicare spending starting to drop.

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Mike Konczal is a Fellow with the Roosevelt Institute, where he works on financial reform, unemployment, inequality, and a progressive vision of the economy. His blog, Rortybomb, was named one of the 25 Best Financial Blogs by Time magazine. Follow him on Twitter @rortybomb.