CRFB Shows that Long-Term Problems Remain Very Far From Solved
Today, CRFB has released a new paper, Our Long-Term Debt Problems Are Very Far from Solved, which shows while recent improvements may have benefited our budget outlook over the short and medium term, we have made little progress on the long term and sizable challenges still remain. Or to quote CBO Director Doug Elmendorf "the fundamental budgetary challenge has hardly been addressed."
Specifically, we highlight five important points about the long-term outlook.
- Despite projections of historically low discretionary spending levels and historically high revenue levels, the federal debt is growing unsustainably over the long run due to health care cost growth and population aging.
- Deficit reduction enacted to date has helped reduce current and future levels of debt (though levels are still at historical highs) but done little to change the long-term trajectory of debt.
- While we need $2.2 trillion in savings over the next decade to get control of the debt, those policies will need to yield closer to $13 trillion of deficit reduction over the next two decades to put the debt on a clear downward path relative to the economy.
- No plausible rate of economic growth can reverse growing debt levels.
- Acting now can allow policymakers to make smaller and more gradual changes spread over more generations.
Since the enacted savings so far has focused mostly on discretionary spending, which is not a driver of our debt, there has not been a similar improvement in the long-term outlook. We estimate that to get debt back to its historical average of around 40 percent over the next 75 years would require the equivalent of non-interest savings of three percent of GDP each year (the fiscal gap).
In order to stick to our minimum sustainable debt path, lawmakers would have to enact growing savings (including interest) over time: 1 percent of GDP in the first ten years, 3.5 percent in the next ten years, and 6 percent in the ten years after that. The graph below shows the divergence between the minimum debt path and CRFB Realistic over time.
Debt as a Percent of GDP, 2010-2080
While the budget conferees may be focused on setting discretionary levels for 2014 and sequester-replacement, the paper is an important reminder of the need to focus on the long-term debt problem along with our analysis of CBO's Long Term Outlook report. The longer we wait, the harder it will be to solve.
Click here to read the full paper.