Alan Auerbach and William Gale at the Tax Policy Center recently released their frequently-updated budget projections. Their new outlook is familiar to those following the official CBO numbers: a somewhat stable near-term outlook but continuously rising debt over the long term. Beyond the overall debt numbers, their report contains a number of interesting tidbits about the composition of the budget and considerations for policymakers in addressing deficits and debt.
Auerbach and Gale's projection shows debt remaining at around 75 percent of GDP over the next three years before rising steadily to 81 percent by 2025. This is somewhat higher than CBO's 2025 debt level of 77 percent of GDP largely due to different policy assumptions the authors make. Specifically, they assume that temporary tax provisions -- including the tax extenders that expired at the end of last year -- are permanently extended and that lawmakers will grow appropriated spending with inflation rather than having it limited by the sequester-level caps. On the other hand, it assumes that war spending is drawn down rather than increased with inflation.
The authors make a number of observations about this ten-year outlook. Maybe most notable is the fact that unlike previous large debt run-ups, like those during wars, the current outlook does not show debt returning to a more normal level after the increase following the Great Recession; debt will continue increase from its already high level.
CBO’s latest budget baseline projects ten-year deficit numbers to be slightly smaller than previously estimated, despite the passage of legislation increasing the deficit. The biggest cause: a drop in projected interest rates, which lead CBO to revise down total interest spending by $385 billion, or about 7 percent, through 2025.
CBO now expects rates on three-month Treasury bills to be lower for the next three years before stabilizing at 3.4 percent in 2020, one year later than projected in January. CBO expects longer-term bonds to pay permanently lower interest rates, with ten-year notes ultimately reaching only 4.3 percent instead of 4.6 percent.
This downward revision represents the continuation of a trend we noted last year. Compared to its March 2011 projections, CBO now sees $2.2 trillion less interest spending over the 2011-2021 period, a drop of nearly 40 percent. About 90 percent of that drop is due to lower projections for interest rates and technical factors, and the rest is due to lower debt levels than projected in 2011.
Our recent analysis of the Congressional Budget Office's (CBO) August baseline focused on CBO's official current law baseline projections, which show debt declining very slightly in the near term from 74 percent of Gross Domestic Product (GDP) this year to 73 percent by 2018 and then rising to 77 percent by 2025. As it turns out, however, the situation could be notably better or notably worse depending on how policymakers handle a few outstanding matters – many a part of the gathering fiscal storm Congress will face this fall.
If lawmakers ignore fiscal responsibility as they have been recently, debt will rise much more rapidly. In our paper we estimated an Alternative Fiscal Scenario (AFS) based on past assumptions CBO has used. The AFS extends expired and expiring tax provisions and permanently repeals the sequester-level discretionary spending caps. And under the AFS, debt will rise continuously every year from about 74 percent of GDP today to 78 percent by 2020 and 85 percent by 2025. Earlier this year, CBO estimated that this level of debt growth could shrink the economy by as much as 7 percent by 2040 compared to the baseline.
CRFB has released its analysis of CBO's latest ten-year budget projections, detailing the important facts from the report and how it has changed from previous estimates. As we noted earlier, the new baseline is very similar to the previous one released in March, showing a relatively subdued outlook for debt in the short term but growing deficits and debt for several years thereafter.
Click here to read our analysis.
Debt is projected to decline slightly in the near term from 74 percent of GDP in 2015 to 73 percent by 2018 before rising to 77 percent by 2025. Extrapolating further, we estimate that debt held by the public would exceed the size of the economy by 2040.
There is a similar story for deficits, which will fall to a low of 2.1 percent of GDP in 2017 before rising to 3.1 percent in 2020 and 3.7 percent in 2025, when the deficit will reach $1 trillion. These widening deficits in later years are the result of spending rising – driven by increases in health care, Social Security, and interest spending – while revenue stays largely flat.
The Congressional Budget Office (CBO) just released its August baseline, updating budget projections from March and economic projections from January. CBO continues to show debt on an unsustainable path, rising continuously as a percent of GDP after 2018. Combined with its long-term projections released last month, the agency shows the clear need to enact deficit reduction to avert a huge rise in debt over the long term.
While debt will improve slightly in the near term, declining from last year's post-war record of 74 percent of GDP to 73 percent by 2018, it will then rise to 77 percent of GDP by 2025. Based on our calculations of the assumptions in CBO's Alternative Fiscal Scenario, debt will reach 85 percent of GDP by 2025. These estimates are very similar to the March projections.
Under CBO's current law projections, deficits will fall to $426 billion this year and a low of $414 billion in 2016, but then begin to rise with $1 trillion deficits returning in 2025. Over the course of the next decade, deficits will average 3.1 percent of GDP, including 3.7 percent of GDP deficits in 2025. By comparison, the 50-year historical average level for deficits is 2.7 percent of GDP.
Steven Rattner wrote an article in yesterday's The New York Times discussing the financial problems facing millennials. Rattner writes that millennials, those currently aged between 18 and 34 years old, are expected to earn less than previous generations and face greater college debts. Looking further out, the rising national debt means this generation is likely to face a combination of higher taxes and lower benefits than generations before them.
In line with Rattner's argument, we’ve written previously about how waiting to reduce the debt increases the costs of doing so and shifts the burden onto fewer people.
Rattner acknowledges that the bleak outlook for millennials is partly the result of bad timing, noting that “those who graduate in weaker economic times typically earn less than those who enter the work force during more robust periods. Starting behind often means never catching up.” He also cites large increases in student debt as weighing on their future prospects.
According to the Congressional Budget Office (CBO), rising debt levels could reduce projected annual income by between $2,000 and $6,000 per person by 2040, while a deficit reduction plan could instead increase income levels and reduce interest rates on government debt, an effect that would flow through to mortgages and other loans.
This is just one of many economic findings included in CBO's latest Long-Term Budget Outlook, which shows very clearly that rising debt could be detrimental to the American economy.
While CBO's standard long-term projections are based on "benchmark" economic projections which generally assume no major changes in fiscal policy, they also warn of the limits of such projections. As CBO explains, rising debt can have feedback effects by crowding out private investment in favor of public debt and ultimately slowing economic growth.
CBO's report quantifies these effects and their effect on debt. Under current law – where debt grows from about three-quarters of the size of the economy today to equal to the size of the economy by 2040 – CBO estimates GNP would be 2 percent smaller by 2040. If lawmakers continue to add to the debt in many of the ways that they have recently as in the Alternative Fiscal Scenario (AFS) – and debt reaches 156 percent of GDP by 2040 – CBO estimates the economy would shrink by an additional 5 percent, or roughly 7 percent in total. On the other hand, a $4 trillion deficit reduction would increase the size of the economy by 5 percent as compared to the Extended Baseline and 3 percent above the benchmark level.
Any budget projections, including CBO's long-term outlook, are inherently uncertain, and it is important to understand how projections might change. The agency's usual ten-year projections are uncertain enough and can change based on any number of new developments. That problem only grows when looking out 25 or 75 years into the future.
For example, the Brookings Institution last year discussed the usefulness of long-term projections, how to convey uncertainty in those projections, and how policymakers could make the budget more responsive to changing conditions. In its long-term report, CBO addresses the latter two issues, spelling out a number of ways its projections could change and providing examples for how lawmakers could reduce budgetary uncertainty.
A main source of uncertainty is the actions of lawmakers. CBO's Extended Baseline assumes that Congress will not pass new laws (with some exceptions) to change deficits, allowing temporary policies to expire and keeping permanent savings in place. To illustrate a potential scenario where lawmakers add to the debt, the Alternative Fiscal Scenario assumes that lawmakers extend temporary tax breaks, repeal the sequester, prevent revenue from rising as a share of GDP, and raise non-health care/Social Security spending to its 20-year historical average. Under this scenario, debt exceeds the size of the economy ten years earlier than in the Extended Baseline and in 2050 reaches 250 percent of GDP, twice the Extended Baseline level.
Outside of legislative uncertainty, several economic and technical factors could influence projections.
Much of the focus on the Congressional Budget Office's (CBO) score for repealing the Affordable Care Act (ACA) naturally has focused on the ten-year budgetary and economic feedback effects, which showed that repeal would increase deficits by $353 billion on a static basis, or by $137 billion if macroeconomic effects were incorporated. As we pointed out in our write-up, though, CBO also provides an estimate of the second-decade effects, finding that repeal would increase deficits over the second decade in the broad range of one percent of GDP (which implies around a $3.5 trillion deficit increase).
CBO doesn't provide a detailed year-by-year score beyond the first ten years because those estimates, as it explains, "would not be meaningful because the uncertainties involved are simply too great." However, the report does provide enough information for a reasonable estimate to be made based on the growth rates of the broad categories of policies, which show the savings generally rising much faster than the costs.
To estimate the long-term impact of the legislation, CBO divides the bill into parts and assigns simplifying growth rates to each part. Specifically, CBO assumes the following:
- Savings from repealing coverage provisions – including new spending as well as revenue from the mandates and Cadillac tax – will grow by about 2 percent per year
- Costs of repealing Medicare and Medicaid savings – including reduced growth rates for provider payments -- will grow by about 15 percent per year
- Costs of repealing non-coverage tax increases – the biggest being the Medicare investment income tax – will grow by about 6 percent per year
The main focus of CBO's long-term budget outlook is rightly on the unified budget numbers regarding spending, revenue, deficits, and debt. But it is also important to look at trust funds, both in what CBO estimates for their insolvency date and how CBO's assumptions about trust funds can affect debt.
CBO's ten-year projections also project insolvency dates for three trust funds: the Highway Trust Fund (later this summer), the Social Security Disability Insurance (SSDI) trust fund (FY 2017), and the Pension Benefit Guaranty Corporation's (PBGC) multiemployer pension fund (FY 2024). The PBGC's trust fund exhaustion is reflected in the budget numbers, meaning that spending is automatically limited to incoming revenue, but the other two much larger trust funds are assumed to continue spending at scheduled levels despite not having the resources to do so.
The same goes for the two trust funds whose exhaustion dates will come after ten years and thus are only discussed in the long-term outlook: the Medicare Hospital Insurance (HI) trust fund and the Social Security Old Age and Survivors' Insurance (OASI) trust fund. CBO does not specifically project an insolvency date for HI, which finances Part A of Medicare, because it doesn't do long-term projections for each part of Medicare. It does say that exhaustion would likely come shortly after ten years, and by the looks of the ten-year projections, that date would likely be around 2027.
As for OASI, CBO projects the trust fund to run out in 2031, the same as it projected last year. But on a combined basis, the Social Security trust funds would be depleted in 2029, one year earlier than CBO projected last year.