Ten Things You Should Know About CBO’s New Long-Term Budget Outlook

June 16, 2015

 

1. We have a spending problem, not a taxing problem. Projected revenues will exceed their 50-year historical average of 17.4% of GDP this year and grow to 18.3% of the economy in this decade. Over the long term, spending growth will exceed revenue growth.  Spending will never fall below the historical average of 20.1% of GDP and will rise much more rapidly than revenues, hitting 22.2% of GDP by the end of the decade.[i]

 

2. Entitlement programs drive the debt. Mandatory spending now accounts for more than 60% of noninterest spending.  CBO specifically calls out entitlement programs, saying, “Most of the growth in mandatory spending has involved Medicare, Medicaid, and Social Security.  Federal outlays for those programs made up almost half of the government’s noninterest spending during the past 10 years, compared with less than one-sixth five decades ago.”[ii]

 

3. Specifically, health care spending will drive the accumulation of debt.  Most of the anticipated growth in noninterest spending is expected to come from Obamacare premium subsidies, Medicare, Medicaid, and the Children’s Health Insurance Program.  Spending on these programs is projected to far outpace economic growth, increasingly crowding out private spending.  The federal government now accounts for roughly half of all health care spending, quickly catching up to private spending.[iii]

                       

 

4. Social Security outlook gets 10% worse.[iv]  CBO’s projection of the long-term deficit in Social Security worsened in this year’s outlook.  The change results from lower expected interest rates and lower taxable income, among other factors. Nearly one-quarter of all federal spending ($880 billion)[v] will go to Social Security in fiscal year 2015, with no decrease in sight.

 

5. Kicking the can doesn’t pay.  Putting off action to shrink the debt would cost 23% more per year if we wait five years.  If we wait ten years, the pain will increase by 60%. To keep debt at its current level would still require spending reductions, tax increases or a combination of the two, equivalent to 1.1% of GDP annually. Waiting ten years to take action in this case would cost 70% more per year than taking action now.  CBO notes, “Even if policy changes that shrank deficits in the long term were not implemented for several years, making decisions about them sooner rather than later could hold down long-term interest rates, reduce uncertainty, and enhance businesses’ and consumers’ confidence.”[vi]

 

6. A 100% tax hike on families.  In 2015, a married couple with two children earning the median income pays roughly 4% of their income in federal individual income taxes alone.  By 2025, taxes will take an 8% share of that same family’s income.[vii]

 

7. Obamacare doesn’t cut it.  ACA subsidies will cost the government over $40 billion this year alone.[viii] Supporters of Obamacare often proclaim that the law will slow health care costs.  However, nearly half of the long-term growth in health care program spending is expected to come from excess cost growth. Over the next ten years, one-third of the portion of this increase will be due to provisions of the ACA.

 

8. A nation less secure.  Over the next ten years, defense spending is expected to shrink nearly 20% as a share of the economy.  At a time when we face increasingly brazen enemies around the world, the last thing the United States needs is a dwindling recognition of our troops’ efforts. According to CBO, “The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.”[ix]

 

9. A rapid increase in debt is not so easily undone. Cutting debt as a share of the economy to its 50-year average by 2040 would require either cutting spending by 13%, raising taxes by 14% ($1,700 for a middle-income taxpayer) per year, or some combination of the two.  For one year, this is equal to $480 billion—or $1,450 per person—in 2016 alone.[x] The projected amounts of debt would reduce the total amounts of national saving and income in the long term; increase the government’s interest payments, thereby putting more pressure on the rest of the budget; limit lawmakers’ flexibility to respond to unforeseen events; and increase the likelihood of a fiscal crisis.

 

10. Meager growth on the horizon. Compared to the 2014 report, CBO’s 2015 projections lowered its average annual real GDP growth projection for the next 25 years by 0.1 percentage point to 2.2%.[xi]

 

Read the full report at: http://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/50250-LongTermBudgetOutlook.pdf