December 18, 2014

Despite Lower Deficit, CBO’S New Long-term Budget Projections Show Need For Broad Fiscal Reforms

WASHINGTON -- The Concord Coalition said today that updated long-term projections from the Congressional Budget Office (CBO) show why Washington must pursue comprehensive fiscal reforms even though the federal deficit has fallen rapidly this year. 

“We’ve had some good short-term news on the deficit this year, but CBO’s new Long-Term Budget Outlook helps put this news in proper perspective,” said Robert L. Bixby, executive director of The Concord Coalition. “It’s an antidote for complacency and denial. On our current path, the oversized federal debt will continue to grow and annual deficits will soon begin to rise again -- even with some optimistic assumptions about future spending restraint. Yet a bipartisan chorus of elected officials in Washington is still shying away from dealing with the core problems: retirement and health care programs growing on autopilot faster than the economy and a deeply flawed tax system that cannot efficiently produce adequate revenues.” 

 

The fiscal year that ends Sept. 30 will mark the end of a four-year string of federal deficits that topped $1 trillion each year. In addition, technical revisions this year in the calculation of the Gross Domestic Product (GDP) have been incorporated in the CBO’s new projections, making federal deficits and debt appear lower relative to the size of the economy.

“It’s important to keep in mind that much of this year’s deficit reduction resulted from a strengthening economic recovery rather than substantial fiscal reforms,” Bixby says. “As for the technical revisions in calculating the size of the economy, they do not really change the government’s long-term budget trajectory.”

The one area of the budget projected to shrink rapidly because of legislation is discretionary spending. By 2023, this part of the budget is projected to fall from 8 percent of GDP in 2012 to 5.3 percent of GDP. This represents a decrease of one-third as a result of the Budget Control Act’s spending caps and sequester. 

Over the long-term the CBO simply projects that this part of the budget will stay at that level even though discretionary spending has averaged 8.4 percent of GDP over the past 40 years. It is reasonable to assume that this projection will not be matched by congressional action. Already Congress is having difficulty passing appropriations bills that stay under the caps and the sequester. Thus it is likely that this area of the budget will not shrink as rapidly as the CBO projects, much less remain at such a constrained level over the long-term.

Health Care spending is another area where spending might be higher than the CBO projections. CBO’s projection assumes a 25 percent cut in doctor reimbursements under Medicare at the end of the year due to the flawed Sustainable Growth Rate (SGR) formula.

Additionally, the CBO goes into great detail about how uncertain their projections for health care spending are due to a number of dramatic circumstances. One is the impending addition of tens of millions of individuals into government insurance programs beginning with full Affordable Care Act (ACA) implementation in 2014. Another is that the Medicare population will increase by about a third over the next two decades due to the aging of the population. Finally, health care cost growth has been decreasing over the last few years and there is a great deal of uncertainty as to why and how lasting that decrease will be.

The slowdown in health care costs is undoubtedly good news. Yet a great deal of systemic change and legislated reform is still needed to ensure the health care system in general, and the federal government’s health care programs in particular, can be put on a sustainable path while providing better care.

Concord urges the American public and elected officials in both parties to heed this recent summary of the budget situation by CBO Director Doug Elmendorf:

“The federal budget deficit has fallen faster than we expected . . . However, relative to the size of the economy, debt remains historically high and is on an upward trajectory in the second half of the coming decade. The fundamental budgetary challenge has hardly been addressed: The largest federal programs are becoming much more expensive because of the retirement of the baby boomers and the rising costs of health care, so we need to cut back on those programs or increase tax revenue to pay for them.”

Washington must quickly reach agreement on a budget plan for the fiscal year that starts two weeks from today. Congress must also quickly approve an increase in the federal debt, ideally without a lot of phony brinksmanship that could again destabilize the financial markets.

Beyond this short-term work, however, our elected officials must finally start concentrating on the longer-term challenges that are underscored by today’s CBO report.

The longer they wait, the more difficult those challenges – and their solutions – will be.

Media Contact: Steve Winn, swinn@concordcoalition.org or 703-254-7828.