October 25, 2014

Concord Coalition Warns That New CBO Numbers Demonstrate Why Fiscal Stimulus Should Not Make The Long-Term Outlook Worse

WASHINGTON -- The Concord Coalition warned today that under reasonable assumptions about spending and tax policies, budget deficits could easily exceed $6 trillion over the coming decade. Given that a fiscal stimulus package would further expand the deficit, Concord urged that any such legislation be carefully designed to have its maximum effect in the very near future, minimize costs in later years, and provide the greatest stimulus for the amount of spending or tax relief.

"While much attention will be paid in the coming weeks to the contours of a fiscal stimulus bill, no one should overlook the implication of today's report by the Congressional Budget Office that we are heading into the baby boomers' retirement years in a position of fiscal weakness. Despite several years of economic growth, the budget remains in deficit and now policymakers are contemplating even higher deficits to avoid or mitigate a possible recession. It is an inauspicious way to begin the year in which boomers begin to qualify for Social Security retirement benefits," said Robert L. Bixby, executive director of The Concord Coalition.

"At the moment, there appears to be a political consensus around fiscal stimulus that is 'targeted, temporary and timely.' If those criteria are scrupulously followed, a fiscal stimulus bill would not present long-term concerns. Clearly, however, there is a risk that some will want to add long-term agenda items that have little to do with short-term stimulus. Fundamental changes in long-term tax or spending policy should not be undertaken in the context of an effort to apply quick, short-term, fiscal stimulus. Most of all, what must be avoided is a costly bargaining process in which support for proposals with dubious bang for the buck and potential long-term costs is exchanged between Democrats and Republicans in the name of 'getting something done.' As the size of the expected package rises this risk will increase. In an atmosphere of crisis, attention can easily be diverted from the need for long-term fiscal discipline," Bixby said.

"The fiscal and economic consequences of the boomers' retirement is clearly reflected in the CBO numbers. Slowing labor force growth reduces CBO's projection of economic growth by the end of the decade and the boomers' eligibility for Social Security and Medicare accelerates spending growth. Regardless of the mix between spending and taxes, a fiscally responsible budget plan must lay the foundation for dealing with the fiscal consequences of an aging population and rising health care costs," Bixby said.

On the surface, the CBO report shows a dramatic improvement in the budget's outlook over the next decade even as the baby boom generation begins to retire. This deceptively benign outlook is not because spending on health care and retirement programs is held in check. To the contrary, between 2008 and 2018 the cost of Social Security, Medicare, and Medicaid will increase by 20 percent -- from 9 percent to 10.8 percent of the economy (GDP). As a result, these three programs, which consumed 42 percent of federal spending in 2007, will consume 53 percent by 2018.

The reason for the baseline improvement is that it assumes policymakers will hold discretionary programs, including defense, to just 2.2 percent growth annually beyond 2009 -- in contrast to the 6.7 percent annual average rate from 1997 through 2006 -- and that they will not enact new legislation to extend any expiring tax cuts or provide relief from the Alternative Minimum Tax (AMT).

The Concord Coalition's baseline scenario uses alternative assumptions contained in the CBO report. It reflects more plausible policies based on recent trends. Our baseline assumes:

  • Appropriations rise at the same rate as economic growth (GDP), not inflation

  • Funding for operations in Iraq and Afghanistan will slow gradually

  • All expiring tax provisions are made permanent

  • Relief from the AMT is extended

These changes turn CBO's 10-year baseline surplus of $274 billion into a deficit of $6.47 trillion. Instead of an $87 billion surplus in 2012, there would be a deficit of $485 billion. By 2018, the baseline surplus of $223 billion becomes a deficit of $954 billion.

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The Concord Coalition is a nonpartisan, grassroots organization dedicated to balanced federal budgets and generationally responsible fiscal policy. Former U.S. Senators Warren Rudman (R-NH) and Bob Kerrey (D-NE) serve as Concord's co-chairs and former Secretary of Commerce Peter Peterson serves as president.

Plausible Baseline: http://www.concordcoalition.org/learn/budget/concord-coalition-plausible-baseline

CONTACT:
Jonathan DeWald
(703) 894-6222
jdewald@concordcoalition.org