July 30, 2014

New CBO Projections Should Spur Action on Fiscal Reform

WASHINGTON -- New long-term projections from the Congressional Budget Office (CBO) underscore the critical need for the President and Congress to produce a broad, bipartisan budget agreement to put the nation on a more responsible path.

“The CBO’s numbers and analysis back up what elected officials have long known but failed to address: Federal finances are on an unsustainable course that threatens our economic future, risks turmoil in the financial markets, and burdens generations to come with massive amounts of debt,” said Robert L. Bixby, executive director of The Concord Coalition.

Administration officials and top lawmakers are continuing to meet this week to negotiate a compromise budget plan that would include an increase in the federal debt limit by Aug. 2, when the Treasury Department says the government would otherwise be at risk of default. In addition, a small bipartisan “gang” of senators has been working on a comprehensive, long-term plan based largely on recommendations from the President’s National Commission on Fiscal Responsibility and Reform.

“Clearly, we have a lot more to worry about than finding $2 trillion of savings to raise the debt limit,” Bixby said. “We have a deep underlying structural deficit that won’t go away without substantial legislative action. Current budget negotiations will need to be broader in scope and participation to get the job done. We don’t just need a ‘Gang of Six.’ We need a gang of all 535 members.”

Focusing on the next 25 years, the CBO says the budget outlook under current law is “daunting” but warns that it is “much bleaker” under an alternative scenario that many analysts believe presents “a more realistic picture.” Because current law includes many policies that are widely expected to change, Bixby urged policymakers to pay close attention to the “bleaker” scenario and the steps that would be necessary to avoid it.

Under current law, the CBO says the federal debt will reach about 70 percent of the gross domestic product (GDP) by the end of this year, the highest percentage since shortly after World War II and well above the 40-year average of 37 percent. The recent recession is partly responsible, but so is a gap between spending and revenue that predated the recession.

Federal debt is then projected to rise to 84 percent of the economy by 2035 -- even with substantial additional revenue. Interest on the debt would rise to 4 percent of GDP, up from about 1 percent now. Under the bleaker alternative scenario, federal debt would rise to above 100 percent of GDP over the next decade. It would exceed its historical peak of 109 percent by 2023 and would approach 190 percent in 2035.

“As the CBO points out,” Bixby said, “the growing number of retiring baby boomers and the continuing upward spiral in health care costs will put tremendous pressure on the federal budget in the years ahead, even after a full economic recovery and an assumed reduction in military commitments abroad. These are hard facts that should not be obscured by political rhetoric and overly optimistic projections of economic growth.”

The CBO report shows that through 2035, 64 percent of the growth in our largest mandatory spending programs is due to the aging of the population, with health care cost growth accounting for the rest. Over the longer term, health care cost growth becomes the most dominant factor, contributing to 56 percent of program growth relative to aging’s 44 percent.

The main components of spending growth clearly show what is driving the numbers. In CBO’s alternative scenario, between 2011 and 2035:

  • Medicare grows by 3 percent of GDP
  • Social Security grows by 1.3 percent of GDP
  • Medicaid and other health programs grow by 1.8 percent of GDP
  • In total, these programs add 6.1 percent of GDP to federal spending by 2035

The magnitude of this growth can be demonstrated by comparing it to various items in the current budget. For example, in 2010 defense spending (including war costs) was 4.7 percent of GDP. Non-defense discretionary spending (including the stimulus bill) was 4.5 percent of GDP and individual income taxes were 6.2 percent of GDP. In terms of the 2010 budget, adding 6.1 percent of GDP would have increased spending by nearly $900 billion, producing a deficit of $2.2 trillion instead of “only” $1.3 trillion.

However, the projected growth of federal programs is not the full extent of the problem. Deficits add to spending by increasing interest costs. Under CBO’s alternative scenario, which assumes that revenues remain at the 40-year average of 18.4 percent of GDP, interest costs would grow from 1.4 percent of GDP in 2011 to 8.9 percent in 2035. In other words, interest payments would become the largest federal expense.

“A sustainable fiscal reform plan will need to deal with the projected growth of Medicare, Medicaid and Social Security,” Bixby said. “We can do this by slowing the growth of these programs, cutting other programs or raising new revenues. As a practical matter, we’ll probably have to do all three. It’s long past time for partisan purists in Washington to recognize that.

“While we must be careful not to hinder the current economic recovery, the striking numbers in the CBO’s new report provide those who are involved in the current budget negotiations with a fresh incentive to develop responsible mid-term and long-term plans.”

 

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The Concord Coalition is a national, grassroots organization dedicated to fiscal responsibility. Former U.S. Senators Warren B. Rudman (R-NH) and Bob Kerrey (D-NE) serve as its co-chairsand former U.S. Secretary of Commerce Peter G. Peterson serves as president. For more information, visit www.concordcoalition. org .