CBO Director Douglas Elmendorf testified before the House Budget Committee this morning following CBO's release of the 2014 Budget and Economic Outlook on Tuesday. In his opening statement, Director Elmendorf addressed CBO’s projection of a return to rising deficits beginning in Fiscal Year 2016. While the budget deficit is projected to be on pace with historical levels at 3 percent of GDP in 2014, it will begin to rise once again in 2016 and will exceed $1 trillion by 2022. Elmendorf attributed this to spending increases driven by an aging population, expansion of federal subsidies for health insurance, rising healthcare costs per beneficiary, and mounting interest payments on the federal debt, among other factors. Additionally, the federal debt is and will be at historically high levels, and Elmendorf laid out the consequences:
The large budget deficits recorded in recent years have substantially increased federal debt, and the amount of debt relative to the size of the economy is now very high by historical standards. We estimate that federal debt held by the public will equal 74% of GDP at the end of this year and 79% in 2024 under current law. Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.
Addressing the composition of spending, Elmendorf stated that Social Security, major healthcare programs, and net interest payments on the debt are the largest drivers of the debt, as we noted yesterday. While these categories increase, the rest of federal government spending is projected to fall from 9.5 percent of GDP in 2014 to 7.5 percent in 2024, its lowest level since at least 1940. As a result, Elmendorf highlights, an increasing share of the budget is going toward benefits from a few large and growing programs.
The hearing centered around CBO’s projection of falling labor force participation in coming years, which was a factor in the deterioration of the budget outlook and the topic of much discussion. In his opening statement, Elmendorf said:
The increase in participation stemming from improvements in the economy will be more than offset by downward pressure from demographic trends, especially the aging of the baby boom generation. After 2017, when the demographic trends will still be unfolding, but the effects of cyclical conditions will, we expect, have largely waned, the participation rate is projected to decline more rapidly. That is the main reason why beyond 2017 we project that economic growth will diminish to only a bit more than 2% per year, a pace that is well below the average seen over the past several decades.
Although he did not specifically mention the Affordable Care Act’s impact on labor force participation in his opening statement, committee member questions made it the focus of the hearing. The outlook identifies the ACA as a source of falling labor force participation. In response to a question from Budget Committee Chairman Paul Ryan, Elmendorf stated CBO projects a 1.5-2 percent decrease in the number of hours worked over the 2017-2024 window. In terms of Full Term Equivalency (FTE), this corresponds to between 2-2.5 million fewer FTE workers. Elmendorf clearly stated this is an issue of some workers choosing not to participate in the labor force, not one of employers slowing hiring or laying workers off. We will delve into CBO's labor force projections in great detail later this week.
Overall, despite a reduced deficit estimate for 2014, the longer-term outlook demonstrates that the drivers of our debt have not been dealt with and our fiscal issues remain far from solved.
Elmendorf's full testimony can be seen below.