Other CRFB Papers
While CBO's debt projections have improved under the Extended-Baseline scenario, debt has worsened under the Alternative Fiscal Scenario. But under either path, debt reaches unsustainable levels. CRFB argues that policymakers should act immediately to put in place a credible plan to stabilize the debt gradually as the economy recovers.
CRFB Reacts to CBO's Long Term Outlook
June 30, 2010
Today, the Congressional Budget Office (CBO) released its Long Term Budget Outlook, which paints an alarming and dismal picture of the country’s fiscal future. Under current law, public debt will reach 79 percent of the economy by 2035 and about 107 percent by 2080. Under CBO’s Alternative Fiscal Scenario, which is seen to be a more likely policy path and includes the extension of many expiring policies as well as modifications to certain savings assumptions that may not materialize, debt will reach 87 percent by 2020, 185 percent by 2035, and an astronomical 854 percent by 2080. Talk about unsustainable. CBO also reports that even with health care reform, population aging and excess cost growth remain the largest problem areas in the budget and will push deficits and debt to untenable levels. If current policies are continued, federal spending is projected to increase from 24.3 percent of GDP today to over 35 percent by 2035, whereas revenue levels will be far from sufficient to sustain the projected growth in spending—increasing from 14.9 percent today to 19.3 percent in 2035. “Aging, health care costs, and an outdated, insufficient revenue system are set to bury the country in debt,” said CRFB president Maya MacGuineas. “Are the findings in this report really the messages we want to be sending our creditors?” “Policymakers must begin working on real solutions to our long-term problems now,” said MacGuineas. “With debt levels expected to soar, policymakers must embrace meaningful reforms to help us regain control over future deficits, reduce the risks of a fiscal crisis, and keep the economic recovery on track. If this year’s Long Term report isn’t a call to action, I don’t know what is.”
Today, the Congressional Budget Office (CBO) released its Long Term Budget Outlook, which paints an alarming and dismal picture of the country’s fiscal future.
Under current law, public debt will reach 79 percent of the economy by 2035 and about 107 percent by 2080. Under CBO’s Alternative Fiscal Scenario, which is seen to be a more likely policy path and includes the extension of many expiring policies as well as modifications to certain savings assumptions that may not materialize, debt will reach 87 percent by 2020, 185 percent by 2035, and an astronomical 854 percent by 2080. Talk about unsustainable.
CBO also reports that even with health care reform, population aging and excess cost growth remain the largest problem areas in the budget and will push deficits and debt to untenable levels.
If current policies are continued, federal spending is projected to increase from 24.3 percent of GDP today to over 35 percent by 2035, whereas revenue levels will be far from sufficient to sustain the projected growth in spending—increasing from 14.9 percent today to 19.3 percent in 2035.
“Aging, health care costs, and an outdated, insufficient revenue system are set to bury the country in debt,” said CRFB president Maya MacGuineas. “Are the findings in this report really the messages we want to be sending our creditors?”
“Policymakers must begin working on real solutions to our long-term problems now,” said MacGuineas. “With debt levels expected to soar, policymakers must embrace meaningful reforms to help us regain control over future deficits, reduce the risks of a fiscal crisis, and keep the economic recovery on track. If this year’s Long Term report isn’t a call to action, I don’t know what is.”
For press inquiries, please contact Kate Brown at (202) 596-3365 or email@example.com.
CNN | June 4, 2010
Last Friday, the House passed and sent to the Senate a jobs bill that was scaled down in an effort to control the cost.
The American Jobs and Closing Tax Loopholes Act, which was originally projected to cost around $190 billion, would still cost more than $100 billion and add roughly $50 billion to the deficit. This does not include the tens of billions that will be part of a supplemental spending measure, which will deficit-finance war spending and other "emergency" measures.
That's a lot of borrowing to add to a debt that already exceeds $8 trillion. It raises a host of questions. Does the economy need measures to help with job creation? Are these the best measures? Should they be paid for or simply added to the deficit?
Obviously, the unemployment rate is still far too high. Although there are pockets of growing employment and other encouraging economic signs, job growth will likely lag during the recovery. As the unemployment rate hovers close to 10 percent and families struggle to deal with the potentially devastating effects of sustained joblessness, efforts to ease the pain are indeed warranted.
The problem is, no clear-cut way exists to use federal dollars to promote sustainable job growth. The House bill includes an extension of unemployment benefits, a bump-up in slated federally funded physician payments, and an extension of some expiring tax breaks. Would this create a host of shiny new jobs? Unlikely.
Unemployment benefits are in order because they help struggling families, although criticisms that they may prolong unemployment by reducing incentives to look for work are not unfounded.
The inclusion of the "doc fix" -- or the patch to the slated reductions in physician reimbursement rates -- is certainly not a credible policy to create jobs, but rather an example of muddying up important legislation with unrelated items. Further, the doc fix, a long-standing problem, should have been addressed as part of health care reform. So although a jobs bill makes sense, it is hard to argue that this one holds much hope for doing much to improve the employment situation.
Nonetheless, this bill is the one we've got. If that is the starting point, then should it be paid for? There are those who argue that adding the cost of the bill to the deficit, rather than paying for it, would create more stimulus, which is what the economy needs right now.
Frankly, many of these pro-stimulus arguments are made more for political reasons than for economic ones. There are plenty of members of Congress running for re-election who want to offer more benefits and tax cuts, but few who want to pay for them. So the stimulus label comes in quite handy.
So far, to control costs, certain measures have been dropped from the bill -- such as extending Medicaid benefits to the states and providing COBRA subsidies -- and the cost has been lowered by shortening the period over which the doc fix would apply. But Congress may well choose to make many of these changes later, so this is more kicking the can down the road instead of making the necessary hard choices.
Instead, those who support the bill should be willing to pay for it. As moderate Democratic Rep. Stephanie Herseth Sandlin of South Dakota said, "We need to pay for our priorities, and that principle doesn't just apply only when it's easy -- it's especially important when the decisions get tough."
It would be fine to borrow to provide more stimulus now as long as the cost of the bill was paid for over a longer period of time -- say, five years. Demonstrating that we are serious about fiscal responsibility as well as economic stimulus would be the best way to boost the economy and reassure credit markets that the U.S. remains a good place to lend for the long term. If instead we continue to pile up too much debt, it could cause our creditors to balk, pushing up interest rates and choking off the very recovery we are trying to foster.
There are an infinite number of ways to offset the costs of the measures in the bill. For instance, unemployment benefits could be financed by instituting a short-term freeze on federal pay -- something that would be reasonably fair given that as wages have fallen in most of the economy, federal workers have continued to see their salaries rise faster than inflation.
Similarly, we could offset the cost of the doc fix by strengthening the new Medicare commission, which was part of health care reform, by allowing it to make recommendations that affect more parts of the health care system, including hospital payments, participant costs and government health subsidies, and directing it to find additional savings.
As the bill moves to the Senate, some are already trying to water down the existing offsets such as the increase on the taxation of carried interest, which eliminates a loophole that allowed hedge fund and private equity firm partners to pay lower income tax rates than ordinary wage earners. This is exactly the opposite of what is needed.
From here on out, the name of the game has to be paying for added spending in one area by spending cuts in other areas. We cannot afford to add more to the national credit card -- an irresponsible approach to budgeting that will weaken the economy over time and do nothing in the effort to create sustainable job growth.
NIHCM Foundation | May 2010
Our Burgeoning Federal Debt
There is little doubt that the United States is on an unsustainable budget path. Budget projections made by the Congressional Budget Office (CBO) have consistently anticipated an explosion in federal non-interest spending, fueled by rapid growth in Medicare, Medicaid and Social Security spending due to rising health care costs and an aging population. The directors of the CBO and the Government Accountability Office, the Social Security and Medicare trustees, and many other budget analysts have been sounding the alarm on this front for years.1 These warnings have not, however, resonated widely with the public or policymakers. Policy inertia has been the rule.
Now, of course, the problem has become much more immediate. The large budget deficits run up during the economic expansion earlier this decade and the even larger deficits used to combat and resulting from the “Great Recession” have the federal debt climbing to uncomfortable territory. Last year, the federal budget deficit was an eye-popping $1.4 trillion, or almost 10 percent of Gross Domestic Product (GDP). While the deficit situation will improve somewhat as the economy rebounds, deficits will still average well over a half-trillion dollars annually for the rest of the decade, adding continually to federal debt. Our country’s debt burden is quickly expected to reach levels not seen since World War II (Figure 1).
CBO projections show the public debt growing from $5.8 trillion in 2008 to $8.8 trillion in 2010 and climbing to $15 trillion in 2020.2 Total debt, which includes what the federal government owes to the Social Security and other trust funds, is expected to grow from roughly $13 trillion in 2010 to almost $21.5 trillion by 2020. These numbers are so large as to be almost unfathomable.
As troubling as this scenario is, it is almost certainly too optimistic since the CBO projections assume current law is adhered to. If the 2001/2003 tax cuts are not allowed to expire for all taxpayers as scheduled at the end of 2010 or if policymakers continue their routine “patching” of the Alternative Minimum Tax so that millions of Americans don’t have to pay the tax, then CBO’s federal revenue projections will be overstated. Likewise, if Congress again steps in to prevent the large drop in Medicare physician fees dictated by the sustainable growth rate formula, federal outlays for Medicare physician payments will be considerably higher than assumed. Discretionary spending also may grow much faster than the rate of inflation assumed by the CBO.
More likely assumptions show the cumulative deficits between 2011 and 2020 will be $12.4 trillion – twice as large as officially projected. Public debt would reach 100 percent of GDP in 2020. Beyond 2020, without changes, the situation would get far worse. CBO’s current law projections are quite bad, but numbers based on more plausible assumptions are devastating.3
The Harm of Excessive Debt
Borrowing money is the natural response to an economic slowdown, and the added government spending can help to offset lower consumer spending and stem job loss. But excessive debt can push up interest rates, slow wage growth, erode living standards, and deprive the nation of the fiscal flexibility to respond to future crises and new national priorities as they arise. More than half of our total debt, and the vast majority of our new debt, is held by foreign investors – giving our foreign creditors increasing leverage over U.S. policy, both domestically and abroad. With the federal debt about to expand dramatically, the risks of doing nothing are unacceptably high for the American taxpayer. We are also laying an exceedingly heavy burden on future generations who will eventually have to pay for today’s borrowing.
The Policy Response to Date
In his FY 2011 budget proposal, the President has proposed that the 2001/2003 tax cuts be allowed to expire for families making over $250,000 a year, a three-year freeze for all non-security discretionary spending, and reducing or eliminating a number of tax preferences. These are all steps in the right direction, but given the magnitude of the challenges we face, they are baby steps at best. New CBO analysis predicts the proposed budget will add $9.8 trillion, or 5.2 percent of GDP, to the national debt over the next 10 years. This projection was produced just before the final passage of the health care reform legislation and incorporates rough rather than precise estimates for the small savings expected from health reform.
The Administration also proposed the goal of having non-interest spending equal to revenue by 2015, which will require reducing deficits to roughly 3 percent of GDP. However, the spending and tax plan in the proposed budget would reduce the deficit only to $752 billion in that year, or 3.9 percent of GDP.4 The Administration is counting on the newly appointed bipartisan Commission on Fiscal Responsibility to trim the deficit by the final 1 percent of GDP, or almost another $200 billion, needed in order to reach its 2015 fiscal target. The panel must issue its recommendations by December 1, 2010. Recommendations require approval by 14 of 18 Commission members, guaranteeing bipartisan support but also setting a high threshold for action.
In addition to the obvious question of whether the Commission will succeed, one can ask whether its fiscal goal is sufficiently aggressive. Their current goal will bring the deficit down quite slowly and still leave the federal debt at close to 70 percent of GDP, well above historical levels.
An Alternative Proposal
In December 2009, the Peterson-Pew Commission on Budget Reform called on policymakers to set a bold yet reasonable goal: stabilize the debt at 60 percent of GDP by 2018.5 Around this same time, three other groups put forth similar proposals, setting debt-to-GDP targets of 60 to 70 per cent and end dates between 2019 and 2022.6 The Peterson-Pew Commission adopted a six-step plan to return the nation to fiscal health:
Commit immediately to stabilize the debt at 60 percent of GDP by 2018. A credible commitment now to stabilize public debt over the medium term can help to reassure our creditors and financial markets. The 60 percent debt threshold is both reasonable and consistent with international standards identified by the European Union and the International Monetary Fund. A more ambitious target could easily prove too difficult for lawmakers to accept and strains credibility. A less aggressive target might be insufficient to reassure markets.
Develop a specific and credible debt stabilization package in 2010. Congress and the White House must then quickly agree on the necessary reforms – almost certainly a mix of spending cuts and tax increases – and the timing for implementing them. Achieving the stated debt reduction goal will require average deficits of 2 percent over the implementation period, but the changes can start more gradually to avoid stalling the economic recovery.
Begin to phase in policy changes in 2012. The timeline for implementing agreed-upon changes must balance the risk of unduly aggressive changes that hamper recovery against delays that undermine the plan’s credibility and needlessly perpetuate high deficits. While the Commission currently believes economic conditions will favor new policies in 2012, policy makers need to watch conditions closely to determine exactly when to start making changes.
Review progress annually and implement an enforcement regime. Once a plan is adopted, we need a mechanism to ensure that it stays on track. The Commission recommends automatic triggering of spending cuts and tax increases any time an annual debt target is missed. This “debt trigger” should be punitive enough that lawmakers are encouraged to be fiscally responsible but not so large that they would try to override it if targets are missed.
Stabilize the debt by 2018. Reducing the debt to 60 percent of GDP will require a dramatic deviation from the current debt path. While the task will be much easier if we stick to current policy and do not extend expiring tax cuts without paying for them, significant structural changes to the budget will be needed regardless.
Continue to reduce the debt as a share of the economy over the longer-term. As we move to a longer-term perspective we will have to find ways to reduce the debt even below the midterm target of 60 percent of GDP. A more reasonable long-term target is something closer to the U.S. historical fifty-year average of less than 40 percent. Debts at this level would give the federal government the fiscal flexibility to respond to unexpected events such as the economic crisis we just experienced.
Moving Boldly Forward
Policymakers face an immensely difficult and unpalatable task. But as daunting as it will be to develop a plan to put the debt on a sustainable course, there simply is no other option. Action to set the changes in motion must begin right away.
The biggest factor in whether our country will succeed is political will – leaders will need to act together and courageously make very tough choices. Promises to not raise certain taxes or reduce certain benefits only stand in the way of bringing politicians together to develop a realistic plan. Any meaningful effort to address the budget problems will have to be bipartisan, giving both parties political cover and reinforcing the collective will to act. Our debt should not be our destiny. The time to act is now.
1 See, for example, Walker, DM. “Facing Up to America’s Health Care Challenge,” NIHCM Expert Voices essay series. 2008. http://www.nihcm.org/ publications/expert_voices
2 Congressional Budget Office. “The Budget and Eco - nomic Outlook: Fiscal Years 2010 to 2020,” 2010.
3 Committee for a Responsible Federal Budget. “CRFB Analysis of CBO’s January 2010 Baseline,” 2010. http://crfb.org/document/crfb-analysis-cbo%E2% 80%99s-january-2010-baseline
4 Budget of the United States Government, Fiscal Year 2011, http://www.whitehouse.gov/omb/budget/Overview/
5 Peterson-Pew Commission on Budget Reform. “Red Ink Rising, A Call to Action to Stem the Mounting Federal Debt,” 2009. http://budgetreform.org/sites/default/files/ Red_Ink_Rising_hyperlinked.pdf
6 Committee on the Fiscal Future of the US. “Choosing the Nation’s Fiscal Future,” 2010; Center for American Progress. “A Path to Balance,” 2009; and Center on Budget and Policy Priorities. “The Right Target: Stabilize the Federal Debt,” 2010.
CNN | May 20, 2010
Over the past month, we've watched from distant shores as Greece has plunged into a debt crisis. Mounting pressure from global financial markets forced Greece to begin a drastic austerity program.
With a fiscal deficit of 8.1 percent of GDP and government debt of 115 percent of GDP expected this year, Greece has promised to turn itself around by 2013.
To do this, the government has adopted an ambitious fiscal consolidation program that would reduce the annual deficit by 7 percent of GDP this year, 4 percent next year, and 2 percent in 2012 and 2013. The European Union and the International Monetary Fund have announced an extraordinary $1 trillion package to support the plan, and the European Central Bank has announced its own extraordinary measures.
Are there lessons the United States can or should draw from the Greek situation?
First, we are not Greece. The United States is by far the world's largest single economy. Our economy is competitive, diversified and rich in human capital and natural resources. While the rest of the world is important for our growth, our domestic market is vast, which means that, unlike Greece, we can usually rely on domestic demand to drive the economy.
At their best, our financial markets are dynamic, have deep pockets and provide the liquidity for our innovative economy. We issue the world's reserve currency, which minimizes our currency market risk. And unlike Greece, because we have currency flexibility, we can adjust the value of the dollar to improve our underlying economic performance, if necessary.
But we are facing very serious fiscal challenges, too -- and for many of the same reasons as Greece.
Like Greece, our fiscal path is unsustainable for as far as the eye can see. Our debt has surged far above what we have normally been able to manage. And unless fiscal policy changes, it is projected to continue heading up indefinitely.
Our debt-to-GDP ratio is projected to exceed 60 percent this year, well above our average for the past 40 years (around 40 percent) and close to a peacetime high. And it's projected to keep on rising.
Like Greece (and all advanced industrial countries), we can expect our fiscal situation to get worse in about 10 years, as the baby boomers' retirement accelerates. In a generation, the debt is expected to be well over 150 percent of GDP. By 2050, it's projected to be over 300 percent and still heading upward. We cannot sustain this much debt without a crisis.
While the United States may have more fiscal running room than Greece, we won't be able to outrun our creditors if they think we can't manage our fiscal affairs. The impasse in Washington is giving rise to jitters that we can't politically solve our problems, no matter how wealthy our economy. And as the past few weeks illustrate, if we lose credibility with creditors, they may downgrade our debt, demand higher interest rates, and in the worst case refuse to hold our debt because of fear of default.
Maintaining the confidence of our creditors is critical for the United States: We depend on capital inflows to close our fiscal gap because our savings rate is so low. It is harder to rebuild confidence than to lose it.
Finally, as Greece so vividly illustrates, it is better act on your own timetable and according to your own priorities, rather than have actions forced upon you by financial markets. If the United States can make fiscal changes sooner rather than later, once the economy is on a stronger footing, adjustment can be more gradual and less costly. Then our citizens will be able to manage change more easily.
What will it take for the United States to get its fiscal house in order? We need a plan. As we've seen in Athens -- and even on Wall Street over the past week -- uncertainty sows fear, panic and unrest. But our fiscal future does not have to look like this. There is a way forward.
America's first fiscal challenge is political will, not ability to pay. In partnership with the American people, U.S. policymakers need to settle on a reasonable and sensible fiscal recovery plan soon that is credible to both the markets and the ultimate financier: the U.S. taxpayer.
It should be multiyear to reassure creditors and taxpayers that we can indeed manage our affairs over time and that it will not force draconian austerity, if done correctly. We need to know where we want to go and how we can get there.
A clear road map for fiscal change will allow everyone to plan and manage, in contrast to the cold shower the Greeks are being forced to take.
In broad economic terms, the answer is simpler than most people realize. As most experts agree, we need to put the budget on track for stabilizing the debt at no more than 60 percent of GDP when we can realistically manage change. (The 60 percent threshold still has credibility for advanced industrial countries in the global marketplace.)
Although our debt is below that now, commitments already in place will put us on a higher path, even before the baby boomers start to retire. But we need to start phasing in policy changes soon to shift to a more sustainable debt path.
Much like a household budget, a fiscal recovery package also needs to be fair to succeed. Any plan needs to reflect shared sacrifice. Our fiscal problems are so big, everything has to be on the table. Just cutting spending will savage government and prevent it from delivering the things we all rely upon to live our lives and to make them better. Just raising taxes will take money from the poorest and the middle class and rob the country of needed incentives for the investments that boost higher growth.
But within budget limits, we also must make sure that any fiscal package promotes our key values and needs: protecting the weakest among us and raising living standards through increasing human capital (including education), promoting innovation and providing basic infrastructure.
Ultimately, getting our fiscal house in order is about shared sacrifice -- and shared hope. Putting a fiscal recovery plan in place will hasten the recovery and make living standards higher than they would otherwise be. We don't have to look like Greece does now.