On the campaign trail, voters are hearing promises of big tax cuts from the Republican presidential candidates and of big spending increases from the Democrats.
Meanwhile, back in Washington last week, the nonpartisan Congressional Budget Office (CBO) released a new set of projections for the next 10 years that casts serious doubt on how realistic (or responsible) those campaign promises are.
According to CBO’s projections, here are some sobering fiscal facts that will confront the next president:
On the campaign trail, voters are hearing promises of big tax cuts from the Republican presidential candidates and of big spending increases from the Democrats.
Meanwhile, back in Washington last week, the nonpartisan Congressional Budget Office (CBO) released a new set of projections for the next 10 years that casts serious doubt on how realistic (or responsible) those campaign promises are.
According to CBO’s projections, here are some sobering fiscal facts that will confront the next president:
- In 2018, the first fiscal year for which the new president will present a budget, the projected deficit will be $572 billion (2.8 percent of GDP).
- By 2022, the end of the next president’s first term, the projected deficit will be back above $1 trillion (4.4 percent of GDP).
- Projections for a hypothetical second term show a steadily worsening situation, with the deficit above $1 trillion and rising in each year. By 2026, the last year of CBO’s 10-year outlook, the deficit will be $1.4 trillion (4.9 percent of GDP).
- Debt held by the public is projected to grow from 76 percent of GDP this year to 86 percent in 2026, far above the 39 percent average for the past half-century.
This is not a scenario that calls for spending increases or tax cuts, even if offsetting actions are taken to “pay for” them. Keeping the debt from rising higher than current projections does nothing to address the unsustainable path the budget is already on.
The basic dynamic, long warned of and now coming true, is that spending growth on the major entitlement programs is outpacing revenue growth, squeezing out other programs and adding to the debt. Under current law:
- Over the next 10 years, CBO projects that revenues will rise by $1.7 trillion, remaining at about 18 percent of GDP through that time.
- Spending, however, will rise by $2.5 trillion between 2016 and 2026, growing from 21.1 percent of GDP to 23.1 percent.
- Most of this spending growth is driven by major health care programs (32 percent of the increase) [see footnote 1], Social Security (28 percent of the increase), and interest on the debt (23 percent of the increase).
- Mandatory spending — which grows on autopilot and includes the major entitlement programs — along with interest on the debt will consume 99 percent of all revenues by 2026.
The two main reasons for the growth in Social Security and the health care programs are population aging (creating more beneficiaries) and rising health care costs.
According to CBO, “The number of people age 65 and older is now more than twice what it was 50 years ago, and over the next 10 years, that number is expected to rise by more than one-third.”
The CBO also notes that while “health care spending grew more slowly in the past several years than it has historically…over the coming decade, per-enrollee spending in federal health care programs will grow more rapidly than it has in recent years.”
The spike in interest payments on the debt, from $255 billion in 2016 to $830 billion in 2026, is attributable to higher debt and interest rates gradually rising to more normal levels [see footnote 2]. Under this projection, interest on the debt would exceed defense spending by 2024.
Other programs would grow much more slowly in dollar terms and actually decline as a percentage of GDP. For example, income security programs such as the Supplemental Nutrition Assistance Program (SNAP) and unemployment compensation are projected to shrink from 1.7 percent of GDP in 2016 to 1.4 percent in 2026.
Of particular note is the projected path of discretionary spending, those programs funded through the annual appropriations process.
Owing in large part to tight caps agreed to in the Budget Control Act of 2011, discretionary spending — which includes defense, education, transportation, justice, environment and certain veterans’ benefits – will decline from 6.5 percent of GDP in 2016 to 5.2 percent in 2026. This would be the lowest level since record-keeping for this category began in 1962. The 50-year average for discretionary spending is 8.7 percent of GDP.
The contrast between shrinking levels of discretionary spending and rising deficits is captured by the remarkable projection that in 2026 they will both amount to roughly $1.4 trillion. In other words, cutting “waste, fraud and abuse,” as so many candidates advocate, is not the answer; Congress would have to eliminate all discretionary spending to balance the budget that year (assuming there were no entitlement cuts or tax increases).
Overall, CBO’s new projections, while not designed as a reality check for the candidates, function pretty well for that purpose:
“To avoid the negative consequences of high and rising federal debt,” CBO says, “and to put debt on a sustainable path, lawmakers will have to make significant changes to tax and spending policies—letting revenues rise more than they would under current law, reducing spending for large benefit programs below the projected amounts, or adopting some combination of those approaches.”
Anyone up to the challenge is welcome to speak up!
FOOTNOTES
[1] Includes Medicare, Medicaid, the Children’s Health Insurance program and subsidies under the Affordable Care Act (ACA) health care insurance exchanges.
