Short-Term Gain, Long-Term Pain
As we wrote in our September 28, 2015 Weekly Economic Commentary, “Short-Term Gain, Long- Term Pain,” the good news is that the deficit, debt, and pace of federal spending are not on the market’s radar screen currently. The stable debt-to-GDP ratio over the remainder of the decade (as forecast by the CBO) also provides a window for Congress to address the underlying structural problems in the budget, which have been masked—and indeed overwhelmed—by the improving economy and the near-term spending constraints imposed by Congress on nondefense discretionary spending. Any action to address the underlying structural issues in the budget are unlikely until after the 2016 presidential and congressional elections, but recent history suggests that Congress may not act until a crisis is already underway. The biggest risk is that the recent improvement in the deficit (and relative stability in the debt-to-GDP ratio) allows complacency to set in among policymakers in Washington.
The structural and demographic problems that will drive the deficit over the next several decades remain in place, and the longer policymakers
wait to address them, the more difficult they become — and the more painful the solution.
John J. Canally, Jr., CFA, is the chief economic strategist at LPL Financial.