The Corner

CBO to Congress: Our Future Will Involve Lots of Debt

The Congressional Budget Office released its projections of the U.S.’s long-term fiscal outlook today, and it confirms that we’ll be drowning in debt over the next couple decades, with no end in sight. According to the CBO, the federal debt will grow from 73 percent of GDP today to 100 percent in 2038. That’s under fairly rosy assumptions, and assuming little crowding out of private investment by the growing debt. The reality, of course, is likely to be much worse than currently projected. The Hill explains:

The long-term increase occurs mostly in the out years. The budget deficit this year is expected to be $642 billion, a drop from the $1.1 trillion deficit in 2012. The decline will continue through 2015, CBO said.

After that, growing costs related to Medicare and Social Security will add greatly to deficits.

“The unsustainable nature of the federal government’s current tax and spending policies presents lawmakers and the public with difficult choices,” CBO says in its new report. “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger chare of the economy’s total output in the future than they have in the past.”

Major entitlement programs will cost 14 percent of the economy by 2038 compared to a historic average of 7 percent, largely due to the aging of the population and exponential growth in healthcare costs.

Here is what our debt trajectory looks like under those optimistic circumstances:

Check this chart too.

CBO, once again, talks about how unsustainable this path is:

The unsustainable nature of the federal government’s current tax and spending policies presents lawmakers and the public with difficult choices. Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past. Even with spending for all other federal activities on track, by the end of this decade, to represent the smallest share of GDP in more than 70 years, total federal noninterest spending would be larger relative to the size of the economy than it has been, on average, over the past 40 years. The structure of the federal tax code means that revenues would also represent a larger percentage of GDP in the future than they have, on average, in the past few decades—but not large enough to keep federal debt held by the public from growing faster than the economy starting in the next several years.

So the debt will be growing faster than the economy in the next few years, which, considering current levels, will be extremely harmful to the economy. This is not news, of course. Yet some in Congress are talking about repealing the tiny sequester cuts, while very few lawmakers are serious about reforming entitlement spending. As they enter into one more set of CR and debt-ceiling talks this fall, lawmakers need to remember these numbers.

We should obviously reform the tax code and reform Medicare, Social Security, Medicaid, and Obamacare. Martin Feldstein has some suggestions on how to do that in the Wall Street Journal this morning:

The only way to reduce future deficits without weakening incentives and growth is by cutting future government spending. The share of GDP devoted to defense and to nondefense discretionary programs is already headed to its lowest level in the past half-century. Reducing spending therefore requires slowing the growth of the benefits of middle-class retirees and cutting the spending that is built into the tax code.

Raising the age for full benefits is a simple but powerful way to slow the cost of Social Security and Medicare. Thirty years ago, Congress voted to increase gradually the age for full benefits from 65 to 67. Since then, the life expectancy at age 67 has increased by an additional three years. Congress should vote now to continue raising the full benefit age from 67 to 70. When that is fully phased in, the annual cost of Social Security benefits would be reduced by about 20%, equivalent to a saving in 2020 of $200 billion or about 1% of GDP.

Gradually raising the age of Medicare eligibility in line with the age for full Social Security benefits would achieve a budget saving of more than 1% of GDP in 2020 and later years. Individuals between ages 65 and 70 could still enroll in Medicare by paying a fair premium.

Limiting the tax breaks built into the tax code would also help. The combination of tax credits, deductions and exclusions increases the annual budget deficit by hundreds of billions of dollars. Those tax breaks are really subsidies that should be seen as government spending.

My solution would be much more radical than his, but at this point, his proposal certainly beats doing nothing.

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