Today, the Congressional Budget Office (CBO) released its re-estimate of the President’s FY 2016 budget, using its own economic and technical assumptions. While CBO generally shows lower debt in the near term than the Office of Management and Budget (OMB) did, it also shows debt on a slight upward path as a share of GDP after 2020. Thus, it is less likely that the budget would stabilize debt over the long term, as OMB’s projections showed.
According to CBO, debt held by the public in the President’s budget would reach 73.1 percent of GDP by 2025, 1 percentage point lower than in 2014 (and about what OMB estimated), but 1 percentage point higher than in 2020. In dollars, debt would rise from about $13.1 trillion today to $20.1 trillion by 2025.
CBO projects debt under the President’s budget would be $1.1 trillion lower than in CBO’s current law baseline in 2025. Those savings can be mostly attributed to two factors: increased revenue and reductions in war spending that are largely already expected to occur.
CBO projects annual deficits would fall from $486 billion (2.7 percent of GDP) in 2015 to $380 billion (2.0 percent of GDP) in 2016 before rising in every subsequent year to over $800 billion (2.9 percent of GDP) by 2025. Both spending and revenue will be growing as a share of GDP over this period, but spending will increase slightly faster, from 20.5 percent in 2015 to 22.1 percent in 2025, while revenue will rise from 17.8 percent to 19.2 percent. These increases are the result of both current law trends and policy changes proposed in the President’s budget.
CBO estimates deficits through 2025 will be $206 billion higher under the President’s budget than OMB estimates, with more than the entire difference ($345 billion) coming from differences in economic projections. In the other direction, $139 billion of technical differences reduced deficits relative to what OMB estimated. In addition, using CBO’s GDP instead of OMB’s results in the 2025 debt-to-GDP ratio being one percentage point higher.
Ultimately, CBO shows that while the President’s budget responsibly offsets its new spending, it does not go far enough in reducing the debt to ensure fiscal sustainability over the long term.
Read the full paper below, or download a printer-friendly version here.
Today, the President released his FY 2016 budget, laying out his priorities and proposals for the coming year. The budget includes policies and initiatives to reform immigration, taxes, and Medicare, while promoting early and higher education, reducing low-income and middle-class taxes, repealing a portion of future sequester cuts, and implementing other tax and spending changes.
Our main findings from the budget are:
- The President’s budget includes sufficient revenue and spending cuts to pay for his new initiatives and reduce deficits by about $930 billion relative to current law over the next decade. Relative to the President’s baseline, the budget includes $2.2 trillion of deficit reduction.
- Based on its own projections, debt under the President’s budget would remain relatively stable as a share of GDP, reaching 73 percent of GDP in 2025 compared to 74 percent today. In dollar terms, debt will rise from about $13 trillion today to over $20 trillion by 2025.
- Deficits under the President’s budget would remain steady over the course of the decade at about 2.5 percent of GDP each year.
- Between 2015 and 2025, spending will grow from 20.9 percent of GDP to 22.2 percent and revenue from 17.7 percent of GDP to 19.7 percent. Historically, they have averaged 20.1 and 17.4 percent, respectively.
Interest costs alone, in the budget, will grow from under $230 billion (1.3 percent of GDP) today to nearly $800 billion (2.8 percent of GDP) in 2025.
The President’s budget should be commended for responsibly identifying tax and spending offsets sufficient to pay for new spending and tax cuts, and setting aside additional savings for deficit reduction beyond that.
However, the budget does far too little to reduce current debt levels nor slow the growth of entitlement spending over the long-run. Under the President’s budget, debt remains roughly twice as high as in 2007 and higher than any time in history other than around World War II. Meanwhile, Social Security and Medicare remain on paths toward insolvency and both programs – along with interest spending – will continue to grow rapidly.
Ultimately, significant entitlement reforms will be necessary to put the debt on a sustainable path. And the longer we wait to enact these reforms, the larger and more abrupt they will need to be.
Update (2/4): Figure 3 has been updated to incorporate official Treasury Department estimates on the extension of the refundable tax credit expansions.
The Congressional Budget Office (CBO) released its Budget and Economic Outlook today, showing their budget and economic forecasts through 2025. After falling to post-recession lows below $470 billion this year and next, CBO projects deficits will again start to rise, exceeding $1 trillion by 2025.
Over the next decade, CBO projects deficits of $7.6 trillion (3.3 percent of GDP), with deficits growing from a low of $467 billion (2.5 percent of GDP) in 2016 to $1.09 trillion (4.0 percent of GDP) by 2025.
As a result, debt will rise over the next decade, from $13 trillion today to $16.6 trillion at the end of 2020 and $21.6 trillion by the end of 2025. As a share of GDP, debt will remain stable at current post-war highs of about 74 percent of GDP through 2020, but then rise continuously to almost 79 percent of GDP by 2025 and continue to grow unsustainably over the long run.
The gloomy debt and deficit outlook is the result of rising spending and relatively flat revenue collection. Despite discretionary spending falling as a share of GDP, Social Security, health care, and interest spending will grow substantially, pushing spending from 20.3 percent of GDP in 2015 to 22.3 percent by 2025. At the same time, revenue will remain roughly flat at near 18 percent of GDP through most of the next ten years, reaching 18.3 in 2025.
Compared to their prior projections, released last August, deficits are about $175 billion lower through 2024 – almost entirely due to changes in 2016 through 2018. However, long-term economic projections have also worsened – with nominal GDP about 1 percent lower in 2024 – resulting in a slightly higher debt-to-GDP ratio by 2024.
Even these projections assume that lawmakers do not enact new deficit-increasing policies. If they act irresponsibly and extend temporary policies and repeal scheduled cuts, debt would be much worse and could reach 88 percent of GDP by 2025.
Overall, CBO’s baseline shows a fiscal outlook which is clearly unsustainable. Correcting this course will require reducing the gap between spending and revenue by enacting serious tax and entitlement reforms. The longer policymakers wait, the more difficult they will find it to put our fiscal house in order.
Today, the Congressional Budget Office (CBO) released updated budget and economic projections for the coming decade, showing today’s record-high debt levels continuing to rise over the next decade. The report focuses on a “current law” baseline, which assumes policymakers break with the current practice of deficit-financing extensions of various expired or expiring policies. Even under this somewhat optimistic scenario, CBO shows the following:
- In nominal dollars, deficits will grow from $506 billion in 2014 to $960 billion in 2024, and debt will grow from $12.8 trillion to $20.6 trillion.
- As a percent of GDP, debt will stabilize around its post-World War II record high of 74 percent through 2020, before rising to above 77 percent of GDP by 2024.
- Deficits will remain below 3 percent of GDP through 2018, but rise to 3.6 percent of GDP by 2024.
- Federal revenues will stabilize at about 18 percent of GDP, while spending will grow from 20.4 percent of GDP in 2014 to 21.8 percent in 2024.
- The fastest growing part of the budget is interest payments, which will rise from 1.3 to 3.0 percent of GDP by 2024. Spending on the major health and retirement programs will grow from 9.8 to 11.5 percent of GDP.
- Compared with prior estimates, CBO expects the economy to be somewhat weaker, mostly due to 2014 growth being 1.2 percentage points lower.
- Compared with prior projections, CBO expects the debt to be about $400 billion lower in 2024, reaching 77.2 percent of GDP rather than 78 percent.
- If extrapolated forward, we find CBO would project debt to exceed the size of the economy before 2040 and reach nearly 150 percent of GDP by 2060.
CBO continues to show an unsustainable outlook for federal debt, even under current law. Under CBO’s Alternative Fiscal Scenario, where Congress extends various expiring tax provisions, continues “doc fixes,” and eliminates sequestration, debt would reach 85.7 percent of GDP in 2024 instead of 77.2 percent. Lawmakers will therefore need to strictly abide by pay-as-you-go rules and take steps to control the growth of entitlement spending, while enacting other tax and spending reforms to put debt on a downward path over the long run.
See the full paper below, or download it here.
See our followup blog series for additional information on the Trustees Report not included in the analysis below.
The Social Security and Medicare Trustees released their annual reports today on the finances of both programs. The reports are an annual reminder of the action lawmakers should take to ensure the long-term solvency of Social Security and Medicare – both of which continue to face large and growing shortfalls. With regards to Social Security, the Trustees show that:
- The Social Security Disability Insurance (DI) trust fund is on the brink of insolvency, and is projected to be exhausted in 2016 – just 2 years from today. Absent legislation, beneficiaries in that program would face an immediate 19 percent across-the-board benefit cut.
- Assuming reallocation or interfund borrowing, the combined Old Age, Survivors’, and Disability Insurance (OASDI) trust fund is projected to be exhausted in 2033. At that point, absent reform, all beneficiaries would face an immediate 23 percent across-the-board benefit cut.
- Over 75 years, Social Security’s actuarial imbalance totals 2.88 percent of taxable payroll, or 1.02 percent of GDP. This is modestly higher than the 2.72 percent of taxable payroll (0.98 percent of GDP) imbalance that the Trustees reported last year.
- The gap between Social Security spending and revenues is projected to grow from 1.3 percent of payroll (0.45 percent of GDP) this year to 3.9 percent of payroll (1.4 percent of GDP) by 2035 and 4.9 percent of payroll (1.7 percent of GDP) by the end of the 75-year window.
- This report represents the fourth straight year where the 75-year shortfall has increased. In the 2010 report, the shortfall was estimated at 1.92 percent of taxable payroll, but it is now about fifty percent larger at 2.88 percent.
Although the projections have worsened somewhat, Social Security’s long-term outlook is fundamentally unchanged. The DI trust fund will be insolvent in just two years, and the old-age trust fund by the time today’s 48-year-olds reach the normal retirement age – or when today’s 60-year-olds turn 79. The report sends a clear signal on the need for lawmakers to act promptly to reform and secure the Social Security programs for current and future generations
See the full paper below, or download it here.
The Congressional Budget Office (CBO) today released its 2014 Long-Term Budget Outlook, detailing the budget picture for the next 75 years. The report shows debt rising as a share of the economy continuously after 2017, a trend which CBO describes as unsustainable over the long run.
Under the Extended Baseline Scenario (EBS), which assumes that policymakers allow temporary spending and tax provisions to expire and do not further increase deficits in the years ahead, debt held by the public will rise from 74 percent of Gross Domestic Product (GDP) in 2014 – a post-war record – to 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085.
This dramatic rise in debt assumes policymakers act in a fiscally responsible manner. The Alternative Fiscal Scenario (AFS), which assumes that policymakers will increase spending and reduce taxes compared to current law, shows a steeper climb in debt – to 170 percent of GDP by 2040, and by our calculations to 330 percent by 2060, and 620 percent by 2085.
Despite legislation in recent years to raise revenue and reduce spending – particularly discretionary spending – the long-term debt situation remains far from solved. Health and retirement programs will continue to grow faster than the economy at a quicker pace than revenue growth, leading to growing deficits, rising interest costs, and ever-rising debt levels.
Policymakers should act quickly to put in place tax and entitlement reforms to put debt on a sustainable long-term path. The longer we wait to act, the more severe the consequences and the more painful the choices will be.
See the full paper below, or download it here.
Note: The paper's mention of the change in deficits from 2015 to 2024 has been corrected.
Correction: This paper originally stated that the Social Security trust fund is projected to be exhausted in 2033. The combined Social Security and Disability (OASDI) trust funds are actually projected to be exhausted two years earlier, in 2031.