In advance of its scheduled release of an analysis of the President's budget, CBO has updated its budget projections for the next ten years. Their new estimates show a somewhat improved but similar picture to their last baseline in January: slightly falling debt as a share of GDP in the near term but rising debt after that. Debt will dip from 74 percent in 2015 to 73 percent by 2018 but then rise to reach 77 percent by 2025. This blog goes into further detail about CBO's March budget projections and what changed since January.
Over the next ten years, deficits are projected to total $7.2 trillion, or 3.1 percent of GDP. Looking at individual years, though, deficits will be rising throughout most of the period. The deficit will stay around 2.5 percent of GDP through 2018 but rise steadily to 3.8 percent by 2025. These widening deficits drive the rise in debt after 2018, when it increases from a low of 72.9 percent in 2018 to 77.1 percent by 2025. The previous projection had debt reaching nearly 79 percent in 2025.
Every year, the Treasury Department releases the Financial Report of the United States Government, which provides a detailed picture of the government's finances over the next 75 years. This year's report, released last week, shows a similar outlook as previous years; we are on an unsustainable fiscal path.
The report presents budget numbers in slightly different ways than CBO does. For one, instead of reporting an annual deficit, which was $483 billion in FY 2014, it reports the net operating cost. This measure differs in a few key respects:
- It includes changes in government asset values.
- It measures the increase in debt held by the public, a cash-flow measure, in contrast to the deficit, which uses accrual accounting for credit programs.
- It includes the net liabilities of federal retirement and veterans' benefits (and similar programs).
The net operating cost is usually higher than the deficit, but it was much higher this year at $791 billion. Most of this is reflected in the fact that debt increased by a lot more than the official deficit did.
The Financial Report also measures net liabilities of the federal government over 75 years. In addition to the "net position," which is the stock to the net operating cost's flow (like debt is to deficits), it also separately evaluates the net social insurance liabilities of Social Security and Medicare and total net liabilities for noninterest spending. The current net position is $17.7 trillion, and the total noninterest liability going forward is $4.7 trillion, or 0.4 percent of total GDP over the next 75 years. Within the total noninterest liability is the net social insurance liability of Social Security and Medicare, which is $41.9 trillion (4 percent of 75-year GDP), or $14.1 trillion (1.3 percent of 75-year GDP) if current trust fund balances and Medicare general revenue transfers are counted. These totals are larger in nominal dollars than last year's report but similar as percentages of GDP.
Last week, the Heritage Foundation released the Budget Book, a catalog of 106 ways to cut the budget or reduce the size of government totaling roughly $3.9 trillion in ten-year savings. (However, Heritage notes that the total does not include interactions from enacting multiple proposals.) Here are a few highlights:
- 65 percent of the cuts proposed are from a single item – capping spending on means-tested programs at 110 percent of pre-recession levels and growing that amount with inflation. Heritage estimates that this could save $2.7 trillion over the next decade. Heritage does not provide any details about which programs to cut, leaving it up to "policymakers to direct welfare spending to the areas of greatest priority."
- Limiting Highway Trust Fund spending to existing revenue would result in about $180 billion in savings. Since transportation spending would be reduced, "states or private sector [could] take over the other activities if they value them."
- Repealing the Davis-Bacon Act would reduce spending by $86 billion over the next ten years, by Heritage's estimate. The Act requires federally funded construction projects to pay "prevailing wages" based on the project's location. However, the Congressional Budget Office estimated that this would save less than $12 billion. We mentioned this as an option to reduce highway spending in our paper last year, Trust or Bust: Fixing the Highway Trust Fund.
- Ending Supplementary Security Income (SSI) benefits for children would save $125 billion. Heritage would instead direct SSI toward disabled adults and seniors, and only keep the children's payments for medical expenses that Medicaid does not cover.
- Other proposals would end Head Start, higher education programs, and job training programs, resulting in $170 billion in education and training services cuts.
In addition to showing estimates over the next ten years, the President's budget includes in its lengthy Analytical Perspectives section a 25-year estimate of the important budget metrics. This long-term outlook shows the budget stabilizing debt between 73-74 percent of GDP over the entire period, compared to an increase to over 100 percent by 2040 in their "adjusted baseline." This stabilization is a clear improvement from the sharp upward path of debt in current law, but it would still leave debt at a high level, and the estimate relies on some assumptions that may be optimistic.
At the end of the first ten years, spending and revenue sit at 22.2 percent and 19.7 percent of GDP, respectively, for a 2.5 percent of GDP deficit. Over the following 15 years, both spending and revenue increase gradually by similar amounts, ending up at 22.7 percent and 20.4 percent, respectively, in 2040. Deficits, like debt, remain stable in the 2-3 percent range throughout this period.
The relative stability of the budget between 2025 and 2040 over time masks the change in its composition over time. Population aging and health care cost growth push up spending on Social Security and health care, particularly the latter, by nearly 2 percentage points of GDP while other categories of spending gradually fall over time. Revenue increases come from the individual income tax as increases in income push people into higher tax brackets.
CBO's official budget estimates rely on general adherence to current law, meaning that no new laws are passed other than to keep the government functioning basically as is. This means that temporary tax cuts or spending increases are expected to expire as scheduled, and legislated spending cuts and tax increases go into effect as scheduled. Of course, that assumption has had mixed success in recent years, and we've pointed out that if lawmakers don't stick adhere to current law, debt would go from bad to worse.
To illustrate that, we first construct a "PAYGO baseline," which is CBO's current law projections plus an assumed drawdown of war spending, as scheduled. Since CBO's baseline assumes war spending will grow with inflation from its current level of $74 billion, lawmakers can achieve "savings" of $455 billion simply by reflecting the withdrawal from Afghanistan and spending $30 billion per year on Overseas Contingency Operations. This does not represent real savings, since the drawdown is already in place, but it would preclude the possibility of the war designation becoming a permanent slush fund. Under this baseline, debt would grow from 74 percent in 2020 to 77 percent by 2025.
Building off the PAYGO baseline, we then create a "No Offset" baseline, in which lawmakers take fiscally irresponsible stances on a series of decision points, many of which are Fiscal Speed Bumps this year. These decisions include:
- Permanently extending the "tax extenders" that expired at the end of 2014 ($737 billion)
- Enacting a permanent "doc fix" to prevent a 21 percent Medicare physician payment cut in April ($137 billion)
- Permanently repealing the sequester starting in 2016 ($1.01 trillion)
- Permanently extending refundable tax credit expansions beyond 2017 ($203 billion)
CBO's budget outlook, little changed since its last update, shows the same story it has for a few years: the debt picture will stabilize through about the end of the decade, but then will grow by nearly 5 percentage points of GDP between 2020 and 2025 from 74 to 79 percent of GDP.
Simply stabilizing the debt at current levels would require $1.3 trillion of deficit reduction over a decade, while putting debt on a downward path as a share of GDP -- a minimum standard of sustainability -- would require $2.4 trillion of savings.
In previous iterations of CBO's baseline, we showed an illustrative savings path that would leave debt clearly declining as a percent of GDP. For example, in May 2013, we showed that it would take $2.2 trillion of savings over ten years compared to our realistic baseline to put debt on a downward path to 67 percent by 2023. We used this level because the downward path proved robust to having more frontloaded savings, worsening economic projections, and lawmakers enacting deficit-increasing policies.
However, two years have now passed and CBO's projections worsened in the meantime, so the target could be somewhat more lax but require higher savings. Getting debt to 70 percent of GDP by 2025 would take $2.4 trillion of savings compared to CBO's baseline. We estimate that a reasonably backloaded plan of this magnitude would put the trajectory of debt on a clear downward path, and leave deficits in a consistent decline to about 2 percent of GDP by 2025 (instead of deficits increasing as a percent of GDP after 2016 under current law). Of course, actual plans may vary and the extent to which they would ensure long-term sustainability depends greatly on the types of policies included.
Yesterday, CRFB published an analysis of CBO’s latest Budget and Economic Outlook. The six-page document summarizes the forecasts and emphasizes the return of trillion-dollar deficits over the next ten years. Although CBO projects slightly decreasing deficits over the next two years, there will be a jump from a 2016 low of $467 billion to a $1.09 trillion by 2025.
Trillion-dollar deficits are coming back in 2025. That's one of the many stories told by the new budget update released today by the Congressional Budget Office. The deficit, which had fallen to a post-recession low of $483 billion (2.8 percent of GDP) last year, is projected to fall slightly more this year to $468 billion (2.6 percent of GDP), but increase to reach $1.09 trillion (4.0 percent of GDP) by 2025.
Debt will also grow substantially in nominal dollars, from $13 trillion today to $21.6 trillion by 2025. As a percent of GDP, debt will remain stable near its current post-war record of around 74 percent of GDP through 2020, but then it too will start rising quickly, reaching nearly 79 percent of GDP by 2025 and continuing to grow thereafter. As CBO explains, this continuing long-term growth would not be sustainable:
Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis.
The Congressional Research Service's Jane Gravelle recently put out a paper on plans to address long-term deficits and debt. The piece both goes through the many problems with the current budget outlook and different plans that have tried to address it.
Gravelle notes that debt will rise significantly over the next quarter-century to exceed the size of the economy, despite the fact that non-health and non-Social Security spending will decline as a share of GDP.
Although the debt held by the public is projected to be relatively stable over the next decade, the Congressional Budget Office (CBO) projects it will rise to 106% of GDP by 2039. This increase in debt is mainly due to growth in federal spending on health care programs and Social Security, as well as increasing interest payments that typically accompany rising budget deficits. Although spending on these programs is rising, other types of federal spending have remained constant or declined. These trajectories are projected to continue under current policy.
The following table shows how certain areas of the budget are expected to grow or contract as a percent of the economy between 2013 or 2024.
An old saying goes, "Nothing is certain but death and taxes." But in budget projections, neither of those things -- mortality rates nor revenue levels -- nor a host of other economic and technical variables can be predicted with perfect precision. This simple fact has led many commentators to question the usefulness of long-term forecasts that go out as far as 75 years, but also prompted suggestions about how to reduce uncertainty or at least tailor policies to account for it. On Monday, the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy released three working papers and held an event shedding light on both of these questions.
The first paper "The Economics and Politics of Long-Term Budget Projections" by Brookings Senior Fellow Henry Aaron discussed the usefulness of various long-term projections. He argued that 75-year projections for the overall budget -- performed by CBO -- and for Medicare -- performed by their Trustees -- are not all that helpful and should be limited to 25 years. He argued that requiring 75-year numbers forces forecasters to make unrealistic assumptions or otherwise make arbitrary determinations about very uncertain variables like health care cost growth. He did see a use in 75-year projections for Social Security because of lawmakers' tendency to make very gradual benefit cuts, so that lengthy projection period is necessary to fully measure the financial impact of legislation and see how much of a shortfall they have to close.
While Aaron suggested that long-term projections other than Social Security are not useful, University of California, Berkeley's Alan Auerbach takes the opposite conclusion: the uncertainty makes it all the more important to reduce deficits since things could be worse.
His paper entitled "Fiscal Uncertainty and How to Deal With It" started by acknowledging the many different changes in economic variables that can affect the budget. Of course, the uncertainty also compounds the longer projections go for, as more variables factor in and the chance of error increases. But he did not see this as a reason to disregard the projections all together.
Source: Brookings Institution