The Congressional Budget Office issued (another) grim forecast today regarding the long-term outlook of the federal budget. According to a new CBO report, U.S. public debt is set to exceed 100 percent of GDP in 2021, and reach 200 percent of GDP in 2037 if nothing is done to change its current trajectory, a significantly worse projection than was issued in last year’s CBO report.
This year alone, the CBO projects that public debt will reach 70 percent of GDP, up from 62 percent at the end of fiscal year 2010. The historical average for the U.S. is about 20 percent.
“[T]he budget outlook, for both the coming decade and beyond, is daunting,” the summary of the report states. “To keep deficits and debt from climbing to unsustainable levels, policymakers will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.”
In particular, the report reiterates the unsustainability of Medicare “as we know it,” predicting that mandatory federal spending on health care will nearly double over the next 24 years — from 5.4 percent of GDP today to 10.4 percent of GDP by 2035.
House Budget Committee chairman Paul Ryan (R., Wis.) said the report was further indication that the U.S. is headed toward an “ominous credit cliff,” and a glaring example of Democrats’ failure to lead. “Today the CBO reiterated what the American people know, but too many in Washington simply refuse to acknowledge: We are headed for the most predictable economic crisis in American history, and Washington is not providing the leadership we need to avoid it,” he said in a statement. “The President has yet to produce a serious budget that would prevent this crisis, and the Senate has failed to pass any budget for 784 days. This leadership deficit fails to inspire confidence and contributes to the jobs deficit millions of American families are experiencing today.”
CBO director Doug Elmendorf will testify on the numbers tomorrow at the House Budget Committee. His testimony, along with this report, should serve to increase the urgency surrounding the bipartisan deficit negotiations led by Vice President Joe Biden (as if the urgency of the situation wasn’t clear enough already). We’ll see what happens.
UPDATE: Rep. Chris Van Hollen (D., Md.), ranking member on the House Budget Committee, weighs in: “The CBO long-term budget outlook underscores the urgency and importance of getting the economy moving and putting our fiscal house in order. The question is not whether we should reduce the deficit but how,” he said in a statement. “We need a balanced plan, along the lines of what President Obama outlined in his most recent proposal, that reflects America’s priorities.”
Translation: Let’s raise taxes!
But what does the CBO report have to say about this? Well, the reports examines two different forecasts (both are significantly grim). The “extended baseline scenario” assumes, among other things, that the Bush tax rates will expire in 2013 and that the cuts to Medicare envisioned under Obamacare will actually materialize. The “alternative fiscal scenario” (i.e., the far more likely one) assumes that the Bush rates will be extended and that most Medicare spending will remain in place.
Under this second scenario, the CBO predicts “a positive effect on saving and investment from the lower marginal tax rates on capital [that] tends to increase the capital stock, output, and pretax wages compared with what they would be without the effect.”
So, let’s raise taxes?
UPDATE II: Sen. Jeff Sessions (R., Ala.), ranking member on the Senate Budget Committee, poses a fair question: Why hasn’t Kent Conrad (D., N.D.), the committee’s chair, scheduled a hearing to examine the implications of the CBO report?
“Our nation’s debt, driven by years of overspending, threatens us with a Greece-like calamity,” Sessions said in a statement. “CBO’s unnerving projections, released 784 days since the Democrat-led Senate has passed a budget, paint a sobering picture of what will occur if we do not act immediately to bring our spending under control.”
“Today’s report only further highlights the Democrats’ inexcusable refusal to pass a budget in 784 days, during which time we’ve spent more than $7 trillion. Making matters worse, Democrats haven’t scheduled a hearing to discuss this outlook—a hearing the GOP-led House Budget Committee has planned for tomorrow—another stunning decision in a time of fiscal crisis. I hope it’s a decision they will reverse.”