The Bottom Line

July 22, 2014
How Long-Term Debt Looks With Different Assumptions

Any budget projection is inherently uncertain, and that uncertainty is magnified when the projection period is extended to 25 or 75 years, as the Congressional Budget Office (CBO) does in its long-term outlook. That's why CBO publishes an Alternative Fiscal Scenario (AFS), to illustrate what would happen to debt if lawmakers cut taxes and increase spending differently than projected by current law (the Appendix of our analysis explains the differences). However, policy is not the only source of uncertainty in long-term projections; the economic and technical assumptions used also greatly affect CBO's estimates. Fortunately, CBO provides a band of assumptions for mortality, productivity, interest rates, and health care cost growth, showing how they would each affect debt in 2039 (at 111 percent of GDP in the Extended Baseline, including economic feedback effects). We delve into these details below.


CBO's projections assume that population-wide mortality rates decline at 1.2 percent per year. This is somewhat higher than the 0.8 percent decline that the Social Security Trustees assume and is a main reason why CBO's Social Security projections look worse than the Trustees'. CBO evaluates what would happen to debt through 2039 if mortality rates declined 0.5 percentage points faster or slower annually. These different declines result in life expectancy for a 65 year-old being about one year longer or shorter than the default by 2039.

Different life expectancy and mortality rate assumptions affect spending on Social Security, Medicare, and Medicaid (and certain other mandatory programs), but they also can affect revenue by changing the labor supply; CBO assumes that every additional year of life expectancy would cause a worker to spend three more months in the labor force. However, these alternative assumptions make little difference for debt through 2039: it rises from 111 percent of GDP to 113 percent with the faster decline in mortality and goes to 110 percent with the slower decline. These differences would compound over time though, so greater separation would occur in later years.

July 21, 2014

The Bipartisan Policy Center held an event Tuesday commemorating the 40th anniversary of the Congressional Budget Act, which became law on July 12. The event featured two panel discussions: The first panel included six former directors of the Congressional Budget Office (including CRFB Board members Alice Rivlin, Rudy Penner, and Dan Crippen), and the second panel consisted of former chairmen and members of the House and Senate Budget Committees (including CRFB Co-Chair Bill Frenzel and Board member Jim Jones). Bill Hoagland, another CRFB Board member, presided over the event. Both panels touched on the merits of the Congressional Budget Office, which the Budget Act created, and the failure of Congress to pass concurrent budget resolutions in recent years. The speakers also touched on many of the issues raised in our recent paper on the problems with the budget process. On the whole, the panelists stated that the political polarization of Congress, not inadequacies in the Budget Act, was a main reason for the gridlock in the process.

See the full videos of the panels here.

July 21, 2014
Easier to add debt than choose

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

The United States debt now stands at $18 trillion. This is double what it was just a few years ago. The trend, under the presently proposed budgets of President Obama, is that it will triple in another five to seven years.

People point facts like this out all the time. But the response from the president and the Congress is to add more spending that has not been paid for, thus increasing the debt problem.

The two most recent cases are the supposed ‘fix’ of the Department of Veterans Affairs and the highway bill.

July 21, 2014
The Two Budgeteers: All for One in Effort to Update Budget Act

Kent Conrad, a former Democratic senator from North Dakota, and Judd Gregg, a former Republican senator from New Hampshire, are both former chairmen of the Senate Budget Committee. They recently co-wrote an op-ed featured in Roll Call. It is reposted here.

Since ratification of the constitutional authority given to Congress to tax and spend in 1788, our government has struggled to manage the federal budget. After numerous failed budget concepts and commissions, the Budget Act was finally enacted in 1974 to establish the modern-day budget process. Almost exactly 40 years since the Budget Act was signed into law, there is growing consensus among policymakers and budget observers that the system no longer functions as intended.

As former chairmen of the Senate Budget Committee, we have personally witnessed the transformation away from a functioning regular order and toward an ad hoc approach to fiscal policy. Congress adopted an annual budget resolution, approved by both chambers, each fiscal year from 1976 through 1998. Since then, however, there have been eight fiscal years in which Congress has not approved a budget resolution. Government shutdowns, fiscal cliffs, temporary fixes and retroactive policy changes — all without serious consideration of our nation’s fiscal health — have become the new budgetary world order. Even when budget rules are in place, lawmakers evade them with gimmicks, emergency designations and waivers that result in the costs being added to our debt.

One of the core functions of Congress is to review and allocate discretionary spending each year through 12 appropriations bills. If not done by the beginning of the fiscal year on Oct. 1, then either the government shuts down or operates on a continuing resolution. As the Committee for a Responsible Federal Budget points out in a new paper detailing the problems with the current process, the average length and breadth of continuing resolutions has increased in recent years. These temporary funding extensions, along with shut downs, postpone important funding decisions and hamper the efficiency across the federal government.

We also know too well that even when budgets are produced on time, they are often political documents that lawmakers never expect to implement or enforce. Consideration of budget resolutions on the floor of the United States Senate in particular often devolves into late-night “vote-o-rama” sessions where hundreds of political messaging amendments geared to inspire campaign commercials are filed, while there is little debate on the ways to address the long-term drivers of our debt such as the need for tax reform and entitlement reform. In fact, we found the constraints of the budget process and the lack of political will to address the debt so stifling that we worked together to author legislation to create a special commission, later known as the Fiscal Commission or Simpson-Bowles, to bypass some of these process challenges.

July 21, 2014

In addition to showing the path of future debt, CBO's Long-Term Budget Outlook described the consequences of a large and growing federal debt.  The four main consequences are:

  • Lower national savings and income
  • Higher interest payments, leading to large tax hikes and spending cuts
  • Decreased ability to respond to problems
  • Greater risk of a fiscal crisis

According to the report, debt held by the public will rise dramatically in the coming decades, reaching 106 percent of GDP by 2039. The below graph shows the projected increase of the federal debt held by the public from 2014 (dashed line) through 2039 under CBO's extended baseline.

Debt rising to this nearly unprecedented level will have many negative consequences for the economy and policymaking.

July 18, 2014

This week, CRFB President Maya MacGuineas appeared on Bloomberg Television to discuss the CBO's Long-Term Budget Outlook and how imperative it is for lawmakers to address our nation's fiscal challenges.

Debt is basically twice the historical post war average, so that is much too high. But even more troubling is looking forward, the debt is growing and that its going to be the size of the entire economy by 2036.

You have a lot of troubling benchmarks along the way... the [disability insurance] trust fund's going to be running out of funds in a couple of years. By 2030, the combined trust funds of Social Security and Medicare Part A will have run out of reserves. There are so many warning signs that we need to be making changes, and yet you look at what's going on in Washington and we're not making a bit of progress on all these challenges that are so clearly laid out by the CBO.

July 18, 2014

The Congressional Budget Office's (CBO) Long-Term Budget Outlook shows a clearly unsustainable debt path over the long term, one that policymakers will have to address to avoid economic damage. While lawmakers may see the projections and think that getting debt under control is a daunting task, they should keep in mind that the longer they wait, the more difficult it will be to do so. This is true for both the Social Security program and the broader budget. CBO points out in the report that "waiting for some time before reducing federal spending or increasing taxes would result in a greater accumulation of debt ... and would increase the size of the policy changes needed to reach any chosen target for debt."

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. In the report, CBO shows that closing the 25-year fiscal gap, either by keeping debt stable or reducing it to its 40-year historical average share of 39 percent of GDP, would require a reduction in non-interest spending and/or an increase in revenues of 1.2 and 2.6 percent of GDP, respectively, if implemented today. Those changes would grow considerably larger if policymakers waited five or ten years to take action.


July 18, 2014

The Congressional Budget Office’s (CBO) new Long-Term Budget Outlook presents plenty of good news on Medicare costs yet still highlights the role that increased federal health care spending plays in driving the medium- and long-run growth in our debt. While costs are lower than in last year's projection, health care spending is still expected to increase significantly as a percent of GDP over the long term.

Projected federal health care costs overall may be down only a small amount (0.1 percent of GDP annually) since last year's report, but they have now been lowered by an astounding $900 billion cumulatively from 2011-2021. Moreover, CBO also slightly lowered its estimate of underlying health care cost growth because it is based on the historical average of spending growth since 1985 (with recent years weighted more heavily), which now incorporates one more year (2012) of very slow growth. For Medicare, this works out to slower long-term spending per beneficiary growth of about 0.07 percentage points annually.

Despite the improvements, spending on these programs is still scheduled to grow from 4.8 percent of GDP this year all the way up to 8 percent of GDP by 2039.

July 18, 2014

New calculations in the Congressional Budget Office's Long-Term Budget Outlook show that the high debt projected under current law could diminish average annual income by $2,000 within 25 years, and that a $4 trillion debt reduction package would not only prevent that $2,000 hit but could also increase average income in the economy by another $2,000, among other findings.

The report details the economic drag that will be caused by our growing debt once the economy has fully recovered by the Great Recession, if Congress does nothing to address it. Under CBO's "Extended Baseline Scenario," debt would increase from its current 74 percent of GDP to exceed the size of the economy, reaching 108 percent of GDP, by 2040. Yet even the Extended Baseline Scenario is perhaps too optimistic in assuming that some provisions are allowed to expire as scheduled and that Congress won't take any more fiscally irresponsible decisions. CBO also projects an alternative baseline (the "Alternative Fiscal Scenario (AFS)"), which roughly illustrates what would occur if lawmakers continue current policies, keep non-health, non-Social Security spending from reaching historical lows, and do not allow taxes to continually increase as a result of "bracket creep." Under the AFS, debt skyrockets to 170 percent of GDP by 2040, over twice its current level.

CBO's standard budget estimates utilize historical trends of economic growth, inflation, and other variables. They do not, however, incorporate the effects of changing levels of debt on the economy, often called “feedback” or “dynamic" effects. In reality, high and growing debt levels will hinder long-term economic growth. In particular, CBO explains that "higher debt crowds out investment in capital goods and thereby reduces output relative to what would otherwise occur." In other words, high debt harms economic growth.

In its report, CBO has analyzed the harmful effects of debt.  If its economic projections are modified to include these negative effects, the economy is 3 percent smaller in 25 years. If lawmakers return to their more profligate ways and follow the policies in the AFS, the economy will be another 5 percent smaller. In contrast, reducing the debt can lead to modest but real gains in economic growth: a 2 percent larger economy within 25 years.

A bigger economy means increased income for each individual. CBO also shows the effects on per-capita GNP, a rough proxy for average income.  By 2039, GNP would be $78,000 per person before accounting for the negative effects of high debt levels, in today's dollars. If the economic drag from higher debt is included, per capita GNP drops to $76,000 – a $2,000 cut in income. If Congress continues profligate spending and increases debt to the levels in the AFS, GNP will drop by another $3,000, which means the average income will have dropped $5,000 dollars because of high debt.

July 16, 2014

Budget rules require new policies to be paid for with savings elsewhere in the budget. Policymakers must balance the new policy against the choices necessary to offset the costs, forcing them to prioritize and exercise cost restraint. Once PAYGO rules are suspended, however, legislation can be loaded up with new spending or tax breaks without the same scrutiny.

The tax bills considered by the House this year to permanently extend certain breaks are a prime example. These bills have all have been exempted from PAYGO rules which require legislation to be paid for and the budget limits established by the Ryan-Murray budget agreement. As a result, these bills have advanced new tax breaks and expanded existing tax breaks to the tune of $275 billion.

We've long called for Congress to abide by PAYGO with the tax provisions that expired at the end of 2013 known as the tax extenders. However, Congress appears to be holding themselves to a more relaxed standard where they are not required to pay for the costs of extending current policy: the tax cuts can be "extended for free." Even though this is a mistake which allows costs to disappear from the budget process, the door is opened to even greater problems once legislation is exempt from PAYGO. Without PAYGO, nothing prevents legislation from becoming a spending free-for-all of new and expanded tax breaks. 

Only half of the 14 bills approved by the Ways and Means Committee even hold themselves to the more relaxed standard where extensions are free. The other half either expand current tax breaks or enact entirely new breaks, which would add about $275 billion to the debt over and above the $550 billion cost of simply extending current policies. And there are several dozen provisions that haven’t even been considered; all told with interest costs, the expansions could reach $1.5 trillion.

July 16, 2014

One of the biggest stories of last year's long-term outlook was the deterioration in Social Security's financial picture. Largely due to CBO's expectation that people will live longer, its estimate of the 75-year shortfall grew by more than half from their 2012 outlook – from 2.1 percent of taxable payroll to 3.4 percent (1.2 percent of GDP). CBO predicted that the combined Social Security trust funds would run out of money by 2031, two years earlier than predicted by the Trustees. This year's projections show a further deterioration in Social Security's financial situation, with the 75-year shortfall now projected at 4.0 percent of payroll (1.4 percent of GDP) and the trust fund expected to be exhausted by 2030. The Disability Insurance trust fund faces a more immediate issue, with its exhaustion date set for FY 2017.

This year's change is not due to demographics – which look similar to last year – but two broader economic factors: lower interest rates and slower short-term economic growth. CBO has revised its estimate of long-term interest rates down by about 0.5 percentage points. Lower interest rates mean lower debt payments and are actually good for the budget overall but cause estimates to place a greater weight on later years when Social Security is running greater deficits. Thus, the higher weight placed on later years worsens the actuarial balance (and creates a lower return to the assets in the Trust Fund) and is responsible for about half of the change.

The second major change is from changes in ten-year projections since last September, mostly from the February 2014 outlook when CBO revised down its economic growth projections. The resulting forecast had less income tax and payroll tax revenue, which contributed to the worsening Social Security balance by reducing Social Security payroll tax revenue by $230 billion over ten years. This factor represents about 0.2 percentage points of the change in the actuarial shortfall. The remaining 0.1 percentage point comes from technical factors that CBO does not specify.

Change in Social Security Long-Term Projections
  75-Year Change (Percent of Payroll)
September 2013 Shortfall 3.4%
Economic Projections (Interest Rates) +0.3%
Ten-Year Projections (Revenue) +0.2%
Other Changes +0.1%
July 2014 Shortfall
July 15, 2014

CBO's Long-Term Budget Outlook is a long and detailed 140-page document – filled to the brim with facts, figures, scenarios and assumptions – and comes with a spreadsheet with even more data. To help people navigate the report and pull out its key takeaways, we've boiled down the document into a concise 6-page analysis with all the key facts and findings.

July 15, 2014

Earlier today, the Congressional Budget Office (CBO) released its latest Long-Term Budget Outlook. Although CBO normally makes ten-year projections, it also occasionally shows 25- and 75-year projections that highlight our long-term fiscal challenges. As the report states clearly, the fiscal situation is unsustainable, and within the next quarter century, growing debt levels will "push federal debt held by the public to a percentage of GDP seen only once before in U.S. history."

Under CBO's projections, debt will rise from 74 percent of GDP in 2014 (a post-war record high), to 80 percent of GDP by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. The projections are modestly higher than last year's over the next three decades but somewhat lower over the very long term. As expected, the growing debt is largely the result of the rapidly growing costs of Medicare, Medicaid, and Social Security – and the failure of revenue to keep up.

Importantly, those projections assume that Congress follows current law, letting several provisions (such as the tax extenders and doc fix) expire, allowing revenue to grow far above historical levels, and allowing discretionary spending to fall far below historical levels. Under CBO's more pessimistic Alternative Fiscal Scenario (AFS), debt will reach nearly 90 percent of GDP by 2025, 170 percent by 2040, and exceed 250 percent beyond 2050.

July 15, 2014

Yesterday, the Commmittee for a Responsible Federal Budget released a paper detailing the problems with the federal budget process. In light of the 40th anniversary of the enactment of the Congressional Budget and Impoundment Control Act of 1974 this past Saturday, the paper details many problems facing the current budget process.

The paper focuses on three main issues -- each with many aspects to them -- with the modern budget process: lack of transparency, lack of accountability, and lack of a long-term focus. These issues have resulted in poor planning and policy around the debt, with the process increasingly becoming ad hoc, ineffective, and short-sighted in practice.

July 14, 2014

Today at 12.15 p.m., the Peterson Institute for International Economics is hosting a book launch for "Post-crisis Fiscal Policy," a book by the International Monetary Fund (IMF) staff on the role of fiscal policy during the global financial crisis and its aftermath.

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, will participate in a panel discussion at the event, along with the following speakers:

July 14, 2014

Around this time of year, the Social Security Trustees usually issue their report on the status of the program over the next 75 years. In advance of that release, CBO has provided a report to Senate Finance Committee ranking member Orrin Hatch (R-UT) with options for making Social Security solvent over 75 years through payroll tax increases. If no action to address the insolvency is taken, Social Security will see a 23 percent across-the-board benefit cut in the early 2030s. Because CBO's own estimate of Social Security's shortfall is larger than the Trustees', it finds that larger increases would be required to keep Social Security solvent than the Trustees estimate.

Closing the 75-year shortfall through the payroll tax alone would require an immediate 3.54 percentage point increase in the payroll tax rate (to 15.94 percent), compared to the 2.7 percentage point necessary increase projected by the Trustees. CBO also evaluates increases in the cap on income subject to Social Security payroll taxes (the "taxable maximum"), which is currently set at $117,000 for 2014 and increases with average wage growth each year. The cap currently covers 83 percent of wages; raising it to 90 percent would close 30 percent of the funding gap, and eliminating the cap altogether would close 45 percent.

The report also shows that getting to 75-year solvency would require a 2.3 percentage point payroll tax increase in combination with the 90 percent option and a 1.6 percentage point payroll tax increase for the elimination option. There are a number of permutations of these options included in the report, which you can see below.

July 11, 2014

The Office of Management and Budget (OMB) this afternoon released the Mid-Session Review, updating its budgetary and economic estimates for the President's budget. The MSR shows a worse outlook for debt, reaching 72 percent of GDP in 2024 instead of 69 percent as originally estimated, although debt is still on a downward path (albeit a shallower one) as a share of GDP.

July 11, 2014

Both the House Ways and Means Committee and the Senate Finance Committee approved legislation on Thursday to fund a short-term patch for the Highway Trust Fund. Both had previously announced plans with offsets: the Finance Committee had an $8 billion plan relying on increasing tax compliance while the Ways and Means Committee had a $10.9 billion plan relying largely on a budget gimmick known as pension smoothing.

The plans have a lot in common, indicating a degree of bipartisan and bicameral agreement. Both deposit almost $11 billion into the Highway Trust Fund to fund highways through next May, extend customs fees expiring in 2023, and rely on pension smoothing. Yet there are significant differences: the Finance Committee legislation, which passed with bipartisan support, includes several tax compliance measures and only partial versions of some policies in the House bill. Unfortunately, one of the House policies, pension smoothing, is a budget gimmick that only raises revenue in the short term and should not be used to pay for anything.

Pension smoothing, which temporarily reduces companies' pension obligations, changes the timing of some taxes paid, raising money in the first six years and costing money thereafter. Since not all of the costs are measured in the 10-year budget window, the provision appears to raise money in the short term.

If Congress decides it wishes to relieve companies of some of their pension obligations, it should not count the temporary revenue generated by that policy. Further, CBO estimated that as a result of pension smoothing, pensions will be more underfunded, likely resulting in more companies' plans being taken over by the PBGC.

Short-Term Proposals to Fund Highways
Policy House Ways & Means
Senate Finance
Enact pension smoothing $6.4 billion $2.7 billion
Extend customs fees by 1 year to 2024 $3.5 billion $2.9 billion
Increase mortgage reporting - $2.1 billion
Clarify of statute of limitations on overstatement of basis - $1.3 billion
Withhold payments from Medicare providers with delinquent taxes - $0.8 billion
Transfer funds from the Leaking Underground Storage Tank Fund $1 billion
$1 billion
Rescind old transportation earmarks - <$0.2 billion
Total Revenue Raised
$10.9 billion $11 billion
Percent Raised From Pension Smoothing Gimmick ~60% ~25%
July 11, 2014

The House passed legislation today to expand and make permanent the bonus depreciation rules that expired at the end of last year. A key argument for this proposal is that making bonus depreciation permanent would reduce the tax rate on capital and therefore encourage investment and faster economic growth. Some analysts have even found that economic growth would generate enough dynamic revenue to more than pay for the $287 billion cost of the legislation. At the same time, others have claimed that permanent bonus depreciation would not have any significant effect on the economy and would only add to deficits and debt.

A recent Joint Committee on Taxation (JCT) macroeconomic analysis aims to settle this debate. Using a variety of models, JCT finds that permanent bonus depreciation would in fact increase economic growth -- by an average of 0.2 percent over the next decade -- but would cost about the same as under conventional scoring.

JCT's analysis includes 6 different scenarios using two different economic models. The different scenarios are designed to account for differences in savings elasticities, monetary policy, and future fiscal policy to correct for the higher debt. All models find that permanent bonus depreciation would increase business capital -- by between 0.6 and 1 percent over the decade -- and as a result would modestly increase economic growth.

July 10, 2014

The White House this week requested an additional $4.3 billion in discretionary appropriations for the current fiscal year to cover the cost of the "urgent humanitarian situation" involving Central American children crossing the Southern border and to pay for fighting this summer's wildfires. $3.7 billion is dedicated to the situation at the border, while $615 million more for wildfires will likely provide enough funding for the whole wildfire season.

Of the additional funding for the migrant situation, about half ($1.8 billion) would go to the Department of Health and Human Services to provide medical and other care for refugee children. The Department of Homeland Security would receive $1.4 billion to cover the additional costs associated with increased arrests and deportations. The request includes $300 million of international assistance given to governments or non-profits in Central American countries to address the "root causes" of migration, including for economic support and to provide services and community support to the migrants that are most likely to attempt a return.

Administration Supplemental Spending Request by Category (billions of dollars)
Category FY 2015 Spending
Services and medical care for child refugees $1.8 billion
Apprehending, prosecuting, and removing undocumented families $1.4 billion
Repatriation of migrants and aid to Central American countries $300 million
Other increased enforcement and surveillance $177 million
Additional 40 immigration judges and other legal costs $64 million
Subtotal, Immigration Request
$3.7 billion
Wildfire Funding $615 million
Total, President's Request $4.3 billion
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