Budget Projections

High Debt Drags Down the Economy

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.

 

How Uncertain Are CBO's Long-Term Projections?

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.

ACA Repeal Could Add $5 Trillion to the Debt Within 20 Years

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

Shoring Up Trust Funds Greatly Improves Debt

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.

CBO Shows an Unsustainable Long-Term Budget Outlook

The Congressional Budget Office (CBO) today released its 2015 Long-Term Budget Outlook, showing a clearly unsustainable long-term path for debt. The featured projections go out 25 years, building off of their more frequently released 10-year projections, and the further they go out, the worse the fiscal picture gets.

CBO projects that debt will remain relatively stable at about 74 percent of Gross Domestic Product (GDP) through 2020, but then rise continuously, reaching 78 percent of GDP by 2025 and 103 percent by 2040. Beyond 2040, debt would continue to grow continuously to 181 percent of GDP by 2090. Under CBO's Alternative Fiscal Scenario, debt would reach about 175 percent of GDP by 2040. These numbers are very similar to last year, when CBO also showed an unsustainable path.

The Post-SGR Budget Outlook

Lawmakers cleared their second Fiscal Speed Bump of the year - the expiration of the one-year "doc fix" - earlier this month, scuttling the Medicare Sustainable Growth Rate (SGR) formula for good by adding $141 billion to deficits through 2025 ($175 billion with interest). As a result, CBO's last baseline in March is now slightly out of date, and the agency usually doesn't release new ten-year numbers until August, so here's our estimate of what the baseline looks like in the post-SGR world.

The new law increases debt by about one percentage point of Gross Domestic Product (GDP) by 2025, from 77 percent to 78 percent. It also increases ten-year deficits and health care spending by about one-tenth of a percent of GDP while slightly increasing interest spending from 2.9 to 3 percent of GDP in 2025. Not surprisingly, the law slightly increases the share of spending going to health care and interest.

The New Ten-Year Budget Outlook (Percent of GDP)
  2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016-2025
Revenue 17.7% 18.4%
18.3% 18.1% 18.1% 18.1% 18.1% 18.1% 18.2% 18.2% 18.3% 18.2%
                         
Health Care* 5.2% 5.4% 5.3% 5.2% 5.5% 5.5% 5.6% 5.9% 5.9% 5.8% 6.1% 5.7%
Medicare 3.0%
3.0% 2.9% 2.8% 3.0% 3.1% 3.2% 3.5% 3.4% 3.3% 3.6% 3.2%
Medicaid/CHIP 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.1% 2.1% 2.1% 2.1% 2.1%
Exchange 0.2% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%
                         
Social Security 4.9% 4.9% 4.9% 5.0% 5.1% 5.2% 5.3% 5.4% 5.5% 5.6% 5.7% 5.3%
Other Mandatory 2.6% 2.9% 2.8% 2.6% 2.5% 2.5% 2.4% 2.5% 2.3% 2.2% 2.3% 2.5%
Discretionary 6.5% 6.3% 6.0% 5.8% 5.7% 5.6% 5.5% 5.4% 5.3% 5.2% 5.1% 5.5%
Interest 1.3% 1.5% 1.7% 2.0% 2.2% 2.4% 2.6% 2.7% 2.8% 2.9% 3.0% 2.4%
Total Spending 20.5% 20.9% 20.7% 20.6% 21.0% 21.2% 21.4% 21.9% 21.8% 21.7% 22.2% 21.4%
                         
Deficit -2.7% -2.5% -2.4% -2.5% -2.9% -3.2% -3.3% -3.8% -3.7% -3.5% -3.8% -3.2%
                         
Debt 74.2% 73.9% 73.5% 73.2% 73.5% 73.9% 74.5% 75.4% 76.2% 76.8% 77.8% N/A

Source: CRFB calculations based on CBO data
*Includes net Medicare, Medicaid/CHIP, and health insurance exchange subsidies

CBO Releases New Baseline Ahead of President's Budget Estimate

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.

Financial Report of the U.S. Government Shows Bleak Picture

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.

Heritage Foundation Publishes Budget Book of Proposed Spending Cuts

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.

The President's Budget Stabilizes Debt Over the Long Term...Maybe

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.

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