The Congressional Budget Office (CBO) just released its August baseline, updating budget projections from April and economic projections from February. In short, 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 in the near term, declining from 74.4 percent of GDP in 2014 to 72.8 percent by 2018, it will then rise to 77.2 percent of GDP by 2024. This upward trend would in all likelihood continue beyond 2024 as entitlement and interest spending growth will clearly outpace revenue. These ten-year numbers are largely similar to the April projections, which had debt reaching 78 percent of GDP in 2024.
Debt as a Percent of GDP in CBO's Baseline
The Congressional Budget Office (CBO) is set to update its budget and economic projections tomorrow, laying out the fiscal picture for the next ten years. We already know that the FY 2014 deficit is likely to be around $500 billion, close to where CBO had it in their last budget forecast in April. With ten months having been completed in the fiscal year, we can see how the actual data compares to their April forecast by seeing how growth in various programs and revenue sources has come in compared to CBO's expectations. While this exercise won't necessarily show the full picture of what will happen to CBO's outlook for the next ten years, it could illustrate areas where current year data may lead CBO to revise their estimates.
Overall, both spending and revenue through the first ten months of the fiscal year have grown slower than CBO expected. Revenue has fallen shorter of expectations than spending though, meaning that if these growth rates held up through the end of the year, the 2014 deficit would be about $15 billion higher than CBO predicted. Below the table, we look in depth at a few of the specific categories of spending and revenue that so far have differed from CBO's forecast.
In a New York Times article describing Republican plans if they re-take Congress next year, reporter Carl Hulse cited CRFB, saying that "balancing the budget without new revenue would require more than $5 trillion in reductions over a decade." Below, we explain our numbers and show the various ways to balance the budget within a decade.
Using CBO's baseline with a war drawdown, we estimate that there would be a deficit of 3.7 percent of GDP, or $1 trillion, in 2025. Balancing the budget in that year would require 2025 savings equal to that amount, but the path of savings has a great influence on how much in cuts must be made over ten years due to accumulated interest savings.
In a letter to the editor submitted to The New York Times, CRFB president Maya MacGuineas rebutted NYT columnist Paul Krugman on his criticism of Sen. Rob Portman's (R-OH) op-ed in The Wall Street Journal on CBO's long-term budget outlook. MacGuineas pointed out numerous factual errors in Krugman's post and noted the dangerous implications of the debt in CBO's projections, which Krugman seems to dismiss. The letter is posted below in its entirety.
In his blog this weekend, Paul Krugman suggested the cost of waiting to address our mounting national debt is relatively minor. He asks “why, exactly, is [cutting future entitlement costs] something that must be done immediately? If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits. I’ve asked for further clarification many times, and never gotten it.”
This week, CRFB President Maya MacGuineas appeared on Bloomberg Television to discuss the CBO's Long-Term Budget Outlook and how imperative it is for lawmakers to address our nation's fiscal challenges.
Debt is basically twice the historical post war average, so that is much too high. But even more troubling is looking forward, the debt is growing and that its going to be the size of the entire economy by 2036.
You have a lot of troubling benchmarks along the way... the [disability insurance] trust fund's going to be running out of funds in a couple of years. By 2030, the combined trust funds of Social Security and Medicare Part A will have run out of reserves. There are so many warning signs that we need to be making changes, and yet you look at what's going on in Washington and we're not making a bit of progress on all these challenges that are so clearly laid out by the CBO.
The Congressional Budget Office's (CBO) Long-Term Budget Outlook shows a clearly unsustainable debt path over the long term, one that policymakers will have to address to avoid economic damage. While lawmakers may see the projections and think that getting debt under control is a daunting task, they should keep in mind that the longer they wait, the more difficult it will be to do so. This is true for both the Social Security program and the broader budget. CBO points out in the report that "waiting for some time before reducing federal spending or increasing taxes would result in a greater accumulation of debt ... and would increase the size of the policy changes needed to reach any chosen target for debt."
Quantifying the cost of waiting can be done by estimating the fiscal gap, or the amount of non-interest spending and revenue changes necessary to keep debt stable (or reduce it to some other level) over a period of time. In the report, CBO shows that closing the 25-year fiscal gap, either by keeping debt stable or reducing it to its 40-year historical average share of 39 percent of GDP, would require a reduction in non-interest spending and/or an increase in revenues of 1.2 and 2.6 percent of GDP, respectively, if implemented today. Those changes would grow considerably larger if policymakers waited five or ten years to take action.
Earlier today, the Congressional Budget Office (CBO) released its latest Long-Term Budget Outlook. Although CBO normally makes ten-year projections, it also occasionally shows 25- and 75-year projections that highlight our long-term fiscal challenges. As the report states clearly, the fiscal situation is unsustainable, and within the next quarter century, growing debt levels will "push federal debt held by the public to a percentage of GDP seen only once before in U.S. history."
Under CBO's projections, debt will rise from 74 percent of GDP in 2014 (a post-war record high), to 80 percent of GDP by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. The projections are modestly higher than last year's over the next three decades but somewhat lower over the very long term. As expected, the growing debt is largely the result of the rapidly growing costs of Medicare, Medicaid, and Social Security – and the failure of revenue to keep up.
Importantly, those projections assume that Congress follows current law, letting several provisions (such as the tax extenders and doc fix) expire, allowing revenue to grow far above historical levels, and allowing discretionary spending to fall far below historical levels. Under CBO's more pessimistic Alternative Fiscal Scenario (AFS), debt will reach nearly 90 percent of GDP by 2025, 170 percent by 2040, and exceed 250 percent beyond 2050.
The Government Accountability Office (GAO) recently released the spring update to its long-term federal budget simulation series. In their report, GAO produces simulations from 2014-2088 under two sets of assumptions, a Baseline Extended and an Alternative Scenario. These simulations show fiscal conditions under different sets of policy options.
The recent slowdown in federal health care spending has certainly been good news for the budget, knocking hundreds of billions of dollars off projections over the next decade. A main debate in the health policy world lately has been to what extent this slowdown can continue both for public health spending and overall national spending.