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.
Update 3/16/2015: This document was updated to correct several typographical and formatting errors.
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 budget process focuses on the short term, often at the expense of longer-term considerations. This distortion allows policies to be crafted in ways that mask their true costs, and produces results that downplay looming fiscal challenges. The short-term focus leads to many poor outcomes, such as emphasis on short-term deficit reduction (with little improvement in the long-term fiscal outlook), the use of “timing gimmicks” designed to obscure the budgetary impact of policy choices, and the reliance on one-time savings are to ensure “deficit neutrality” within a budget window but deficit increases beyond it.
The short-term focus also causes policymakers to undervalue policies which produce modest savings in the near term but grow significantly over time, including changes to gradually slow the growth of health and retirement programs, or that exempt current beneficiaries of a given program or tax break.
In addition, the short-term focus has led many in Washington to brag that the fiscal situation is under control based on a short-term improvement in the deficit despite the fact that the debt is projected to grow faster than the economy over the medium and long term. (see Deficit Falls to $483 Billion, but Debt Continues to Rise)
The short-term emphasis is the result of both an overreliance on ten-year budget windows for scoring and analysis, and insufficient enforcement of long-term fiscal goals. Modifying the rules governing the budget process could be a powerful tool to help correct this myopic thinking. We suggest several possible remedies:
- Require long-term estimates for significant legislation
- Codify rules prohibiting legislation from increasing long-term deficits
- Allow long-term savings targets for reconciliation
- Establish a second-five-year test for PAYGO
- Require annual budget documents to include long-term information
- Expand the use of accrual accounting where appropriate
One of the first and most important priorities Congress should be agreeing to a budget resolution conference report that lays out a framework for pursuing priorities and addressing issues in a fiscally responsible manner before making major decisions on spending or revenues. We recommend that Congress move forward under regular order, while adhering to the following principles when crafting a budget resolution.
1.Put the Debt on a Downward Path
- Propose revenue and spending targets sufficient to put the debt on a downward path as a share of the economy over the medium- and long-term
- Make realistic and gimmick-free assumptions to achieve this goal
2.Responsibly Address Upcoming “Fiscal Speed Bumps”
- Recognize and address the need to raise the federal debt limit
- Include a plan to fully offset reforms to the Sustainable Growth Rate (SGR)
- Provide for a plan to make solvent the Highway Trust Fund
- Set achievable and responsible discretionary spending levels and offset any sequester relief with more permanent and thoughtful savings
- Responsibly address tax extenders, preferably through tax reform
3.Provide for Tax and Entitlement Reform, Using Reconciliation Where Appropriate
- Include significant and achievable savings targets to slow the growth of Medicare, Medicaid, and other entitlement programs, along with credible examples to achieve these savings and reconciliation instructions to facilitate deficit reduction
- Include language promoting Social Security reform designed to make the program as a whole solvent and avoid the pending insolvency of the SSDI program
- Call for pro-growth tax reform that is preferably revenue-generating and at least revenue-neutral relative to current law; and include mechanisms to provide for prompt action on tax reform
- Focus on the long term by prioritizing savings that grow over time and avoiding timing shifts that would result in higher deficits beyond the budget window
4.Strengthen Budget Enforcement
- Strengthen prohibitions of timing shifts, phony savings, and other budget gimmicks
- Tighten rules exempting Overseas Contingency Operations costs from budget limits
- Prohibit the passage of legislation that would increase deficits in the long term
In the coming months and years, lawmakers will face a number of important budget-related deadlines, or Fiscal Speed Bumps, that will require legislative action. These Fiscal Speed Bumps will present challenges, risks, and opportunities. Addressed irresponsibly, they could cause serious disruptions and/or add as much as $3 trillion to the debt over the next decade above what current law would allow. But if dealt with thoughtfully, they offer an opportunity to pursue reforms that would grow the economy, improve the policy landscape, and reduce the risk of an uncontrollably growing national debt.
We have identified six major speed bumps this year and one next year that is significant enough that it should be dealt with in 2015. These speed bumps include:
- Expiration of the CR funding Homeland Security (February 27, 2015)
- Reinstatement of the debt ceiling (March 16, 2015/Fall 2015)
- Expiration of the “doc fix” and return of the SGR (March 31, 2015)
- Expiration of the highway bill, insolvency of the Highway Trust Fund (May 31, 2015)
- Expiration of 2015 appropriations, return of sequestration (October 1, 2015)
- Deadline to renew tax extenders retroactively (December 31, 2015)
- Insolvency of the Social Security Disability Insurance Trust Fund (late 2016)
In Fiscal Speed Bumps: Challenges, Risks, and Opportunities we discuss each of these moments in detail, put them into historical context, and explain the options available to policymakers as they navigate these speed bumps.
Each of these Fiscal Speed Bumps must be addressed to avoid a major disruption and in each case, unfortunately, addressing the issue irresponsibly could substantially worsen an already unsustainable fiscal situation.
Instead, policymakers should use these speed bumps as opportunity to pursue responsible changes that result in better policy, a stronger economy, and a more sustainable long-term debt path.
Read the full paper below, or download a printer-friendly version here.
Note: The paper has been updated from its original posting to clarify that the $3 trillion difference in debt is above what current law allows (assuming trust funds cannot borrow) rather than CBO's baseline.