How Lawmakers Could Make the Budget Outlook Even Worse

CBO's summary of its budget outlook included a short summary of the long-term debt outlook, which showed debt rising continuously and eventually exceeding the size of the economy. With the full budget report being released earlier this week, CBO has put out a little more detail on what the budget will look like over the next 30 years. Not surprisingly, it shows debt rising significantly in the coming decades with Social Security and particularly health care spending being the main drivers. The fuller detail in the report also allows us to estimate what happens if policymakers don't adhere to fiscal responsibility. The answer: debt goes even higher, reaching 185 percent of GDP in 2050 instead of 150 percent.

CBO's report shows debt reaching 116 percent of GDP by 2036 and 155 percent by 2046, including the negative effects of debt and higher marginal tax rates on the economy. Excluding the economic effects, we estimate that debt would reach 150 percent of GDP by 2050. However, CBO's baseline includes some policy assumptions that may not actually hold up, such as policymakers keeping the sequester in place and allowing temporary tax provisions that have routinely been extended to expire.

Bridge from CBO Baseline to Alternative Budget Outlook
  2026 Debt Effect (Dollars) 2026 Debt Effect (Percent of GDP)
CBO Baseline Debt $23.8 trillion 86.1%
     
Repeal Sequester $897 billion 3.2%
Repeal Health Care Taxes $256 billion 0.9%
Extend Bonus Depreciation at 30% $149 billion 0.5%
Extend Other Temporary Tax Provisions $178 billion 0.6%
Interest $233 billion 0.8%
Total Changes $1.7 trillion 6.2%
     
Alternative Budget Outlook Debt $25.5 trillion
92.3%

Source: CBO, CRFB calculations

Instead, we have created an "Alternative Budget Outlook" to show what debt could look like if these assumptions don't hold up. Specifically, we assume:

  • The mandatory spending sequester is repealed permanently starting next year and the discretionary sequester is repealed starting in 2018
  • Bonus depreciation -- which allows companies to immediately deduct 50 percent of the cost of certain investments in 2016 and 2017, then 40 percent in 2018, and 30 percent in 2019 -- is continued permanently at the 30 percent rate
  • The three health care taxes -- the Cadillac tax, the health insurance tax, and the medical device tax -- that were delayed in last year's tax deal are repealed
  • All other temporary tax provisions from the tax deal extended permanently

Incorporating these assumptions increases ten-year deficits by $1.7 trillion and causes debt to reach 92 percent of GDP instead of 86 percent in 2026. $1 trillion deficits would return in 2021, a year earlier than under CBO's baseline, and debt would surpass the size of the economy by 2028 instead of 2032. Over the longer term, these policies, particularly the Cadillac tax, widen debt further as debt would reach 185 percent of GDP by 2050.

Another way to look at the long term is the fiscal gap, the amount of noninterest deficit reduction needed to hit certain debt targets. In the CBO baseline, it would take changes of 1.9 percent of GDP to hold debt stable for the next 25 years and changes of 3.2 percent to reduce it to 40 percent of GDP. Under the Alternative Budget Outlook, the deficit reduction would need to be about 0.7 percent of GDP larger: 2.6 percent to keep debt stable and 3.9 percent to reduce debt to 40 percent of GDP. These totals are the equivalent of about $500 billion and $750 billion, respectively, in 2017 alone.

As bad as the long-term outlook already looks in CBO's baseline, it could get much worse if lawmakers follow last year's precedent and enact deficit-increasing policies without legitimate offsets.