The Bottom Line

June 29, 2015

Any budget projections, including CBO's long-term outlook, are inherently uncertain, and it is important to understand how projections might change. The agency's usual ten-year projections are uncertain enough and can change based on any number of new developments. That problem only grows when looking out 25 or 75 years into the future.

For example, the Brookings Institution last year discussed the usefulness of long-term projections, how to convey uncertainty in those projections, and how policymakers could make the budget more responsive to changing conditions. In its long-term report, CBO addresses the latter two issues, spelling out a number of ways its projections could change and providing examples for how lawmakers could reduce budgetary uncertainty.

A main source of uncertainty is the actions of lawmakers. CBO's Extended Baseline assumes that Congress will not pass new laws (with some exceptions) to change deficits, allowing temporary policies to expire and keeping permanent savings in place. To illustrate a potential scenario where lawmakers add to the debt, the Alternative Fiscal Scenario assumes that lawmakers extend temporary tax breaks, repeal the sequester, prevent revenue from rising as a share of GDP, and raise non-health care/Social Security spending to its 20-year historical average. Under this scenario, debt exceeds the size of the economy ten years earlier than in the Extended Baseline and in 2050 reaches 250 percent of GDP, twice the Extended Baseline level.

Outside of legislative uncertainty, several economic and technical factors could influence projections.

June 26, 2015

Health care spending is arguably the most important part of CBO's long-term outlook, being a key driver of our nation's growing debt over the long term. Little has changed, though, since CBO's outlook last year, with similar assumptions for excess health care cost growth but a small improvement towards the end of the 75-year period due to a change in an assumption about Medicaid.

As a result of the fiscally-irresponsible physician payment law passed this year and slightly higher assumed long-term cost growth, Medicare spending is projected to be higher than last year's outlook by about 0.1 percent of GDP per year for the next ten years and by increasing amounts in later years. CBO expects Medicare spending to grow from 3 percent of GDP this year to 5.1 percent by 2040 (about as much as all federal health care spending this year), 7.2 percent by 2065, and 9.6 percent by 2090.

Other major health care spending – including Medicaid, the Children's Health Insurance Program, and the Affordable Care Act's (ACA) health insurance subsidies – has improved both as a result of short-term revisions to spending in CBO's ten-year projections and a change in CBO's assumption about Medicaid eligibility over the long term. CBO now assumes that, since Medicaid eligibility is largely determined by the poverty line, which grows with inflation, as real wages increase, more and more of the currently eligible would eventually lose eligibility. In the past, CBO assumed that states would either expand eligibility, increase outreach to the currently eligible, or expand benefits in order to offset this effect, but now it assumes they will only offset one-half of the effect. This assumption reduces their Medicaid eligibility projections by 4 percent over the next 25 years.

June 26, 2015

As Washington digests this year’s CBO Long Term-Budget Outlook, Robert J. Samuelson of The Washington Post offered up his criticism of the country’s current fiscal path: The elderly get too much. The real issue, he argues, is that massive and growing spending on the elderly threatens to crowd out domestic spending that liberals support and defense spending that conservatives support.

As he explains:

...budget deficits are not the problem. They are simply the consequences of the problem, which is that the combination of an aging society and expensive health care threatens many vital government functions. Whatever the economic costs of endless deficits — a controversial subject — the political effects seem straightforward. The young are being forced to subsidize the old through higher taxes and reduced public services. Some essential public services, starting with defense, are being sacrificed to avoid antagonizing the elderly.

Samuelson is not the only one concerned with the disproportionate growth of spending on the elderly. In an opinion piece in February, Forbes contributor Jeffrey Dorfman went as far as to accuse seniors of “bankrupting the country.” A New York Times analysis published earlier this month found that while younger Americans have struggled to see their incomes to keep pace with inflation, Americans ages 65 and older have made substantial gains.

June 25, 2015

In their recently released long-term outlook, the Congressional Budget Office (CBO) laid out multiple scenarios for addressing our unsustainable long-term debt path. They show that it would take a long-term deficit reduction path that would include about $2.6 trillion of deficit reduction over the first 10 years to stabilize the debt at current levels, or about 1.1 percent of GDP per year. However, waiting even 5 years to start would necessitate a reduction of 1.4 percent per year. In other words, stabilizing our debt over 25 years will cost another $850 billion if we wait 5 years instead of acting today.

CBO explains why costs increase with delay:

The sooner significant deficit reduction was implemented, the smaller the government’s accumulated debt would be, the smaller the policy changes would need to be to achieve a particular long-term outcome, and the less uncertainty there would be about what policies would be adopted.

Delaying the start of deficit reduction makes the goals of stabilizing the debt and putting it on a downward path much more difficult.

Quantifying the cost of waiting can be done by estimating the fiscal gap, or the amount of non-interest spending and revenue changes necessary to keep debt stable (or reduce it to some other level) over a period of time. Focusing on the 25-year fiscal gap, CBO shows that keeping the debt stable would require a reduction in non-interest spending and/or an increase in revenues of 1.1 percent of GDP (as indicated above), while reducing the debt to its 50-year historical average share of 38 percent of GDP would require revenue increases and/or spending cuts equal to 2.6 percent of GDP (a path of deficit reduction nearly $6 trillion over the first ten years alone). These figures assume that changes are implemented today and grow considerably larger if policymakers wait five or ten years to take action.

 

June 25, 2015

In recent years, lawmakers have frequently used budget gimmicks to get around rules designed to maintain budgetary discipline -- if they pay attention to them at all. Whether through sleights-of-hand to comply with rules on paper only or simply ignoring rules all together, lawmakers have undermined the integrity of budget enforcement regimes. Today the Better Budget Process Initiative released a paper entitled "Strengthening Statutory Budget Enforcement" that recommends several ways to close loopholes in budget rules and make it harder for lawmakers to ignore them.

The report has 8 specific recommendations:

Strengthening enforcement of existing rules

1. Establish a separate point of order against provisions to exclude costs from PAYGO
2. Prohibit legislation blocking any sequester enforcing statutory PAYGO or discretionary caps

Restrict the use of phony offsets

3. Prohibit the use of spending cuts with no real savings
4. Restrict the use of timing gimmicks to claim savings within the budget window
5. Prevent the use of artificially inflated baselines to claim savings
6. Prohibit double-counting of increased revenues and spending cuts involving trust funds

Ensure all costs are subject to budget discipline

7. Limit the use of Overseas Contingency Operations as a slush fund
8. Expand the deficit-neutrality requirement in PAYGO to apply to debt service

June 24, 2015

Last week, CBO Director Keith Hall testified before the Senate Budget Committee on the release of CBO’s Long-Term Budget Outlook. Senators questioned Hall on the implications of debt and deficit projections for issues like economic growth, income inequality, and climate change.

In his testimony Hall confirmed the negative effects and risks associated with our current and projected debt levels, noting that high debt can lead to lower standards of living and crowd out private investment, which is bad for growth. Asked by Senator Bob Corker (R-TN) whether the federal government was ready for another crisis, Hall answered that another one would be “problematic” and that the government is not, in fact, fiscally prepared.

Hall also confirmed that the projected growth of deficits is largely attributable to an aging population and rising health care costs, which will place stress on mandatory spending. He agreed with a statement by Senator Tim Kaine (D-VA) that reforms to federal benefit programs, coupled with tax reform, are the answer to the country's fiscal challenges.

June 23, 2015

Much of the focus on the Congressional Budget Office's (CBO) score for repealing the Affordable Care Act (ACA) naturally has focused on the ten-year budgetary and economic feedback effects, which showed that repeal would increase deficits by $353 billion on a static basis, or by $137 billion if macroeconomic effects were incorporated. As we pointed out in our write-up, though, CBO also provides an estimate of the second-decade effects, finding that repeal would increase deficits over the second decade in the broad range of one percent of GDP (which implies around a $3.5 trillion deficit increase).

CBO doesn't provide a detailed year-by-year score beyond the first ten years because those estimates, as it explains, "would not be meaningful because the uncertainties involved are simply too great." However, the report does provide enough information for a reasonable estimate to be made based on the growth rates of the broad categories of policies, which show the savings generally rising much faster than the costs.

To estimate the long-term impact of the legislation, CBO divides the bill into parts and assigns simplifying growth rates to each part. Specifically, CBO assumes the following:

  • Savings from repealing coverage provisions – including new spending as well as revenue from the mandates and Cadillac tax – will grow by about 2 percent per year
  • Costs of repealing Medicare and Medicaid savings – including reduced growth rates for provider payments -- will grow by about 15 percent per year
  • Costs of repealing non-coverage tax increases – the biggest being the Medicare investment income tax  – will grow by about 6 percent per year
June 23, 2015

The main focus of CBO's long-term budget outlook is rightly on the unified budget numbers regarding spending, revenue, deficits, and debt. But it is also important to look at trust funds, both in what CBO estimates for their insolvency date and how CBO's assumptions about trust funds can affect debt.

CBO's ten-year projections also project insolvency dates for three trust funds: the Highway Trust Fund (later this summer), the Social Security Disability Insurance (SSDI) trust fund (FY 2017), and the Pension Benefit Guaranty Corporation's (PBGC) multiemployer pension fund (FY 2024). The PBGC's trust fund exhaustion is reflected in the budget numbers, meaning that spending is automatically limited to incoming revenue, but the other two much larger trust funds are assumed to continue spending at scheduled levels despite not having the resources to do so.

The same goes for the two trust funds whose exhaustion dates will come after ten years and thus are only discussed in the long-term outlook: the Medicare Hospital Insurance (HI) trust fund and the Social Security Old Age and Survivors' Insurance (OASI) trust fund. CBO does not specifically project an insolvency date for HI, which finances Part A of Medicare, because it doesn't do long-term projections for each part of Medicare. It does say that exhaustion would likely come shortly after ten years, and by the looks of the ten-year projections, that date would likely be around 2027.

As for OASI, CBO projects the trust fund to run out in 2031, the same as it projected last year. But on a combined basis, the Social Security trust funds would be depleted in 2029, one year earlier than CBO projected last year.

June 19, 2015

For the first time in nearly three years, the Congressional Budget Office (CBO) released a new estimate of the budgetary effect of repealing the entire Affordable Care Act (ACA). Just like in its previous estimates, CBO finds that repealing the ACA would increase ten-year deficits – and this time, they come to that same conclusion even with the economic effects included.

CBO's static estimate of repeal, which excludes macroeconomic effects, shows a ten-year deficit increase of $353 billion, the net effect of $1.174 trillion of tax cuts and $821 billion of spending cuts. Repeal would save money in the first three years of the budget window by $40 billion, but then increase deficits in subsequent years and by $118 billion in 2025 alone. Using this static score, debt would be about 1.4 percentage points higher in 2025 as a result of repeal.

Incorporating the dynamic macroeconomic effects into the budget score reduces the resulting ten-year deficit increase by $216 billion, making the total deficit increase with dynamic scoring $137 billion. The macroeconomic effects peak at $29 billion in 2019 and fall slightly to $20 billion by 2025. The main economic effects include: the decrease in labor supply due to a greater availability of insurance outside employment and from the implicit marginal tax rate increases from the insurance subsidies, as they diminish with income; the decrease in the capital stock from increased tax rates on investment income; and the decrease in aggregate demand from repeal of the insurance subsidies. CBO estimates that ACA repeal would boost GDP by an average of 0.7 percent in 2021-2025.

June 18, 2015

What do earmarks and dinosaurs have in common?

Both are extinct, but their skeletons still remain.

Last week, Senator Jeff Flake (R-AZ) joined the ranks of Rep. Steve Russell (R-OK), Sen. John McCain (R-AZ), and former Sen. Tom Coburn (R-OK) in calling attention to wasteful public spending. This time Flake draws attention to authorized in legacy earmarks through his own report titled “Jurassic Pork.” The report highlights nearly two dozen examples of projects once funded by earmarks that now receive federal funds through other means.

June 17, 2015

Isn’t it ironic, mere days after the Congressional Budget Office (CBO) warns about our nation’s long-term fiscal challenges in its annual report, the House of Representatives is set to vote on repealing a key mechanism put in place to constrain the core driver of our growing debt?

The Independent Payment Advisory Board (IPAB), scheduled for a repeal vote tomorrow, is a 15-member board of Senate-confirmed experts created by the Affordable Care Act (ACA) for the purpose of controlling Medicare costs. If Medicare per-beneficiary cost growth is projected to exceed GDP per capita growth plus one percentage point (GDP+1%), IPAB (or the Secretary of Health and Human Services if no Board members have been appointed) must make targeted recommendations to provider payments – which cannot affect Medicare benefits, eligibility, or cost-sharing – to bring per-beneficiary spending back in line. These recommendations then automatically take effect unless a majority in Congress votes to replace them with equivalent savings or a three-fifths majority of Congress overrides them entirely.

This last protection is valuable given how difficult it is for lawmakers to enact fiscally-responsible reforms otherwise. That repealing IPAB now has broad support in Congress just reinforces its importance.

June 17, 2015

CBO's Long-Term Budget Outlook, released yesterday, is a detailed 130-page document, filled with budget projections for the next 25 years, along with a supplemental spreadsheet with projections for the next 75 years. We've boiled down the document into a concise 6-page analysis with key facts and findings. CBO's debt projections have changed only slightly since last year – slightly higher debt in the next few years and a very modest decline in the still unsustainable upward track thereafter.

As we explain in our paper, CBO projects deficit and debt levels to remain fairly stable over the next few years, but then rise dramatically. Under CBO's "Extended Baseline Scenario," which generally reflects current law, deficits will rise from 2.7 percent of GDP over the next several years, to 3.8 percent by 2025, 5.9 percent by 2040, and 9.5 percent by 2090. As we explain, this will have major implications for debt:

The combination of deficit reduction legislation earlier this decade, low interest rates, and a slowdown in health care cost growth have certainly improved the long-term fiscal outlook, yet debt remains at record-high levels and is set to continue growing unsustainably with no end in sight. If policymakers continue to act irresponsibly – as they did with the “doc fix” legislation earlier this year – the situation will be far worse."

June 16, 2015

The Congressional Budget Office (CBO) today released its 2015 Long-Term Budget Outlook, showing a clearly unsustainable long-term path for debt. The featured projections go out 25 years, building off of their more frequently released 10-year projections, and the further they go out, the worse the fiscal picture gets.

CBO projects that debt will remain relatively stable at about 74 percent of Gross Domestic Product (GDP) through 2020, but then rise continuously, reaching 78 percent of GDP by 2025 and 103 percent by 2040. Beyond 2040, debt would continue to grow continuously to 181 percent of GDP by 2090. Under CBO's Alternative Fiscal Scenario, debt would reach about 175 percent of GDP by 2040. These numbers are very similar to last year, when CBO also showed an unsustainable path.

June 12, 2015

The House is considering trade legislation (H.R. 1314, H.R. 1295, and H.R. 644) this week that would fast-track authority for a few major trade deals that are currently being negotiated, change some trade enforcement rules, and extend various other trade-related provisions. Just as the House's previous bills and the Senate's bills (S. 995, S. 1267, S. 1268, and S. 1269) did, the costs contained in the legislation are paid for over ten years with savings from across the budget.

June 11, 2015

At the end of last month, lawmakers passed a two-month extension of the highway authorization bill with very little fuss. There was no discussion of offsets, and there didn't need to be because the Highway Trust Fund (HTF) is comfortably funded through the end of July, later than policymakers expected the last time they had to fill the HTF last summer. Here's the story on what happened in the last year with highway funding.

Last July, policymakers temporarily plugged the trust fund shortfall with a $10.9 billion general revenue transfer, financed mostly with "revenue" from the pension smoothing gimmick. This transfer intended to extend highway funding through the end of May, when the highway authorization was also set to expire. CBO projected in its August 2014 baseline that the law would leave a $2 billion shortfall in FY 2015 in addition to the $5 billion cushion the Department of Transportation says it needs to be able to reimburse transportation projects in a timely fashion.

Since then, two developments improved the near-term highway funding picture. The FY 2015 CROmnibus passed last December held highway spending to its FY 2014 level rather than having it grow with inflation as assumed in CBO's projections. This change resulted in FY 2015 spending which was lower by about $1 billion.

More importantly, gas prices fell significantly in late 2014 and early 2015, leading to higher fuel consumption and thus more revenue for the trust fund. Now CBO projects that the trust fund will take in $2.2 billion of more revenue in 2015 than they thought last August.

June 9, 2015

Over the past few years, we have seen many attempts by lawmakers to wriggle out of budgetary discipline by resorting to budget gimmicks. A new CRFB chartbook and one-pager highlight many of these gimmicks, including when they have been used and just how they work.

The one-pager, in particular, focuses on four of the most-frequently used gimmicks in recent years.

June 9, 2015

Update: The Reed amendment was rejected in floor consideration by a 46-51 vote.

The Senate is currently considering the National Defense Authorization Act (NDAA), and there are a number of issues at stake. Most notably, this bill has the potential to bring the issue of sequester relief to a head, with Senate Democrats and the White House threatening to block passage of the bill due the use of war spending (Overseas Contingency Operations, or OCO) to allow defense spending to rise above sequester levels. There are also military compensation reforms in the bill, although there is less controversy there since the White House generally supports them.

The NDAA, largely reflecting the Congressional budget resolution, would authorize defense appropriations totaling $605 billion for FY 2016, including $516 billion for regular defense spending, in line with the sequester-level caps, and $89 billion in OCO funding, which is not subject to spending caps. CBO estimates that $50 billion of this OCO funding would be used for war-related activities, with the remaining $39 billion to be explicitly used to backfill regular defense spending (actually slightly larger than the budget resolution's $38 billion slush fund). We’ve written many times about the problem with using this slush fund to get around the spending caps and how it is much more preferable to lift the spending caps and offset them with other savings as they did in 2013. Although this has been a growing trend on the margins, this year's budget and appropriations utilize this gimmick to an unprecedented degree, increasing war spending well above the President's request as opposed to past years when appropriations typically matched the request.

June 4, 2015

Former Arkansas Governor and Republican presidential candidate Mike Huckabee has criticized other candidates who are calling for entitlement reform, but the promises he makes simply don’t add up. Yesterday at a campaign event in Florida, Governor Huckabee suggested that Social Security and Medicare should not change for anyone currently paying into the program, after he has already pledged to oppose any increase in taxes.

When it comes to Social Security, the Huckabee plan is mathematically impossible if he intends to keep the program as self-financing. The program is scheduled to run out of funds on a combined basis by 2033, which is more than 20 years before those newly entering the workforce begin to retire. Even eliminating all benefits for new workers would have no impact on the date of insolvency. That means the Huckabee plan for Social Security would effectively call for cutting benefits across-the-board by 23 percent in the early 2030s.

June 4, 2015
Another Look at That IMF Paper on Debt–and What It Means for the U.S.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

I draw a slightly different conclusion from the International Monetary Fund’s new discussion note, “When Should Public Debt Be Reduced?“ than does my fellow Think Tank contributor David Wessel. The paper argues that while debt is bad for economic growth, under many circumstances paying down a country’s national debt is not desirable. As long as a country isn’t bumping against the upper limit, or exceedingly high debt levels (and, by global standards, the U.S. is not) the policies to pay down the debt–raising taxes or cutting productive government spending–do more damage to economic growth than the good that comes from debt reduction.

But the paper also argues that countries should reduce their debt-to-GDP ratio to ensure that debt isn’t growing faster than their economy.

June 2, 2015

Update: This blog was updated on June 30 to reflect a CBO estimate published on June 23. Our original estimate was $13 billion, based on staff calculations and information published in The Hill.

The House Energy and Commerce Committee recently advanced a bill (H.R. 6) unanimously intended to facilitate research into and the development of medical cures. The bill finds savings from elsewhere in the budget to pay for its $12 billion cost, abiding by pay-as-you-go (PAYGO) rules.

The 21st Century Cures Act intends to promote biomedical research, streamline drug and device development, and make the development of cures more efficient. Among other things, it reauthorizes the National Institutes of Health (NIH) through FY 2018, creates a $2 billion per year NIH Innovation Fund through 2020, makes several changes to facilitate drug development and Food and Drug Administration (FDA) approval, utilizes health IT and telehealth to increase access to new developments, and creates a flexible $110 million per year Cures Innovation Fund through 2020.

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