Every year the Congressional Budget Office (CBO) issues a long-term budget outlook covering the next 30 years assuming no changes in current law. The last such report was released in June of 2019 and covered the 30 years ending in 2049. Later this year, CBO will release its new projections through 2050. However, as part of its January 2020 Budget and Economic Outlook, CBO included a preview of the long-term outlook warning that, “Beyond the coming decade, the fiscal outlook is daunting.”
According to CBO, “By 2050, debt is projected to reach 180 percent of gross domestic product (GDP), far higher than any percentage previously recorded in the United States and on track to grow even larger.”
The updated projection shows a substantial deterioration in the long-term outlook with debt projected to be 30 percent higher than in the June 2019 report.1
Root Causes
Spending and revenues are both projected to grow as a share of GDP over the next 30 years, but spending is projected to grow faster than revenues. This structural gap is already apparent in the 10-year budget outlook. Between 2020 and 2030, revenues are projected to grow by 1.6 percent of GDP, from 16.4 percent to 18 percent. Importantly, this assumes that many tax cuts enacted in 2017 will expire as scheduled after 2025. If those tax cuts are extended, revenues will be more restrained, growing to about 17 percent of GDP in 2030. Meanwhile, spending is projected to grow by 2.4 percent of GDP, from 21 percent in 2020 to 23.4 percent in 2030.
The main cost drivers on the spending side are Social Security and the major health care programs,2 which grow over the next 10 years by 2.7 percent of GDP from 10.3 percent to 13 percent. Spending on those programs will thus grow much faster than revenues even if some of the 2017 tax cuts expire. Spending on other programs, including national defense and domestic appropriations, is actually projected to decline slightly as a share of GDP.3
As deficits and debt increase, interest costs on the debt will also add to spending growth even if interest rates remain low. In CBO’s 10-year baseline, interest grows from 1.7 percent of GDP to 2.6 percent from 2020 to 2030. That alone would consume all of the projected revenue gain.
Looking beyond the next 10 years, the pattern becomes more pronounced, or in CBO’s word, “daunting.” By 2050, CBO projects that revenues would equal 18.6 percent of GDP assuming no changes in current law and that spending would equal 30.4 percent. That would push the budget deficit to 11.8 percent of GDP in 2050, roughly four times the average over the past 50 years (3 percent of GDP). Debt held by the public would reach 180 percent of GDP in 2050, more than twice its current level (81 percent of GDP) and the highest in U.S. history.
Social Security and the major health care programs account for a large share of the spending growth. During the years 2041-2050, CBO projects that Social Security will average 6.4 percent of GDP, up from 4.9 percent in 2020. The major health care programs in 2041-2050 will average 9 percent of GDP, up from 5.4 percent of GDP in 2020. However, the largest growth comes from interest costs on the debt, which goes from 1.7 percent of GDP in 2020 to an average of 5.8 percent in 2041-2050. A more detailed analysis of annual numbers should be available when CBO issues its full long-term report later this year.
New legislation and slower growth make things worse
Three major factors account for the worsening long-term outlook. Revenues are now expected to be lower as a share of GDP beyond 2030; spending is projected to be higher and economic growth is projected to be lower.
According to CBO, the revenue decline is primarily caused by repeal of the so-called “Cadillac Tax” on high-premium employment-based health care plans4 and lower economic growth. These factors have reduced CBO’s 2049 revenue projection by a full percentage point of GDP.
On the spending side, Congress raised discretionary spending higher than assumed in the last report. That raised the “baseline” on which discretionary spending was projected and increased CBO’s projection of 2049 discretionary spending by half a percentage point of GDP.
Even with this change, discretionary spending is still projected to gradually shrink as a percentage of GDP5 because it is assumed to grow no faster than inflation. Given that discretionary spending has averaged 8.3 percent of GDP over the past 50 years, the assumption that it will fall substantially in the coming years is probably unrealistic.
Another big change on the spending side is higher interest on the debt. While CBO revised downward its forecast for interest rates from the June report, the sheer amount of new debt now assumed by CBO pushed projected interest costs higher in 2049 by roughly one percentage point of GDP.
Rounding out the revised 30-year outlook, CBO lowered its assumption of inflation-adjusted annual GDP growth beyond 2030.6 Significantly, CBO said this was due “in part because of slower growth in the agency’s projections of capital services resulting from higher projected deficits in the long term.” In other words, deficits really do matter for the long-term health of the economy.
Cash deficits for Social Security and Medicare add to deficits
Social Security and Medicare have dedicated sources of revenue. For that reason, many people assume that these programs do not present a problem for the federal budget. As CBO makes clear, however, the dedicated resources of these two programs (mostly from payroll taxes and Medicare premiums) do not cover the full amount of benefit payments. Moreover, the fact that Social Security and Medicare currently have positive trust fund balances tends to obscure the fact that the programs’ cash deficits are a major factor in current and projected deficits. In the long-term update, CBO projects that Social Security’s cash deficit will grow from 0.4 percent of GDP in 2020 to 1.9 percent in 2041-2050. Medicare’s cash deficits grow from 1.7 percent of GDP in 2020 to 4.3 percent of GDP in 2041-2050.
Implications for policymakers
Policymakers and 2020 candidates for federal office should acknowledge that the nation’s current debt trajectory is unsustainable. While low interest rates make financing the existing debt easier, they do not prevent an overwhelming accumulation of new debt. Stronger economic growth would help but projected debt levels are so high that economic growth alone will not be sufficient to put the budget on a sustainable path.
What’s needed is an agenda that both grows the economy and closes the structural gap between spending and revenue growth. This requires policies to slow health care cost growth, make Social Security sustainably solvent, expand the workforce, invest more to enhance productivity, boost worker training, and bring in more revenues.
The Concord Coalition has introduced such an agenda, focused on fiscal responsibility and economic growth:
https://www.concordcoalition.org/toward-fiscally-responsible-economic-growth-agenda
We examine health care spending and Social Security because these programs already comprise nearly half of the federal budget and, unlike all other major spending categories other than interest on the debt, are projected to grow faster than the economy. The future of Social Security and health care programs will thus be crucial in determining whether the budget is put on a more pro-growth and sustainable path. They will also affect the economy through the incentives they present to millions of Americans for work, saving, and consumption decisions.
We examine legal immigration policy, workforce training, and federal investment in new technology because of their potential for boosting labor force growth and productivity, which, along with capital formation, are critical factors in building a stronger economy.
Here is the line-up of papers and their authors:
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A New Vision for Health Reform (Alice M. Rivlin, The Brookings Institution, and Joseph Antos, American Enterprise Institute)
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Promoting Economic Growth Through Social Security Reform (Maya MacGuineas, Marc Goldwein, and Chris Towner, Committee for a Responsible Federal Budget)
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Building a Pro-Growth Legal Immigration System (Douglas Holtz-Eakin and Jacqueline Varas, American Action Forum)
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Why Federal R&D Policy Needs to Prioritize Productivity to Drive Growth and Reduce the Debt-to-GDP Ratio (Robert Atkinson, Information Technology & Innovation Foundation)
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Training for Jobs of the Future: Improving Access, Certifying Skills, and Expanding Apprenticeship (Robert Lerman, Pamela Loprest, and Daniel Kuehn, Urban Institute)
The ideas proposed in these papers have the potential to cut across predictable party lines. Each paper can stand alone and would individually advance the goals of fiscal responsibility and economic growth. They are best considered, however, as a comprehensive package of reforms that would have a far greater pro-growth impact if pursued together. For example, increasing labor force growth and productivity would achieve both the individual benefits along with the benefits ensuing from their interaction.
Ignoring our long-term structural fiscal and economic problems will not make them go away and will not build a political mandate for meaningful action. The longer we wait, the more difficult the solutions will be — and the greater the risks will be to the nation’s future.
Endnotes
1 Based on projected debt held by the public in 2049.
2 Major health care programs include Medicare, Medicaid, the Children’s Health Insurance Program and subsidies under the Affordable Care Act.
3 Defense and non-defense appropriations (i.e., “discretionary spending”), is projected to shrink from 3.2 percent of GDP to 2.8 percent from 2020 to 2030.
4 Congress repealed this tax in December 2019, reducing projected revenues by $200 billion in the first 10 years and by increasing amounts in the future. During consideration of the Affordable Care Act, CBO suggested that this tax was the legislation’s single most important cost-control effort. While it was initially scheduled to begin in 2018, it was delayed twice and never went into effect.
5 Discretionary spending declines from 6.4 percent of GDP in 2020 to 5.5 percent in 2041-2050.
6 In the June report, real GDP growth was projected to average 1.9 percent in the years 2040-2049. In the January update, real GDP growth is projected to be 1.6 percent in the years 2041-2050.
