For years, the Congressional Budget Office (CBO), Government
Accountability Office, Social Security and Medicare Trustees, and
think tanks from across the political spectrum have been warning
Congress that the budget is on an unsustainable course, and for
years Congress has ignored them. CBO recently issued a new warning
in their updated "Long-Term Budget Outlook" that is
déjà vu all over again.
Under either of two scenarios CBO examined, spending will
explode, resulting in unprecedented levels of debt and deficits
that would cause substantial harm to the economy. But this year,
Congress does not need to read any further than the summary of the
report to figure out what to do. As CBO states:
Almost all of the projected growth in federal spending other
than interest payments on the debt comes from growth in spending on
the three largest entitlement programs--Medicare, Medicaid, and
Social Security.[1]
Solving America's deficit problem is an impossible task unless
entitlement programs are reformed. The current recession, which has
put a finer point on the problem of trillion-dollar deficits,
should elevate the need for reform to a level not even Congress can
continue to ignore.
Outlook Does Not Look Good
CBO's analysis consists of two sets of projections whose chief
difference is that one, the "Extended-Baseline Scenario," assumes
no changes to current tax policy while the other, the "Alternative
Fiscal Scenario," would extend the 2001 and 2003 tax cuts and patch
the AMT. The former yields higher revenues, resulting in lower
deficits and a rosier outlook than the latter. For simplicity and
to illustrate that even the best-case scenario is a miserable
option, this paper will quote numbers from the Extended-Baseline
Scenario only.
The most frightening findings in this report are the deficit and
debt projections. In this year and next year, the yearly budget
shortfall, or deficit, will be the largest post-war deficits on
record--exceeding 11 percent of the economy or gross domestic
product (GDP)--and by 2080 it will reach 17.8 percent of GDP.
The national debt, which is the sum of all past deficits, will
escalate even faster. Since 1962, debt has averaged 36 percent of
GDP, but it will reach 60 percent, nearly double the average, by
next year and will exceed 100 percent of the economy by 2042. Put
another way, in about 30 years, for every $1 each American citizen
and business earns or produces, the government will be an
equivalent $1 in debt. By 2083, debt figures will surpass an
astounding 306 percent of GDP.
The report also finds high overall growth in the government as a
share of the economy and of taxpayers' wallets that provides an
additional area of concern. While total government spending has
hovered around 20 percent of the economy since the 1960s, it has
jumped by a quarter to 25 percent in 2009 alone and will exceed 32
percent by 2083. Taxes, which have averaged at 18.3 percent of GDP,
will reach unprecedented levels of 26 percent by 2083. Never in
American history have spending and tax levels been that high.
But Why Should This Year Be Any
Different?
Much of the shock of these statistics is old news. The specific
numbers from report to report by CBO and even other agencies have
changed slightly year to year as data is updated and assumptions
are modified, but the message about the budget's unsustainable
course has stayed the same. However, two factors should cause this
year's "Long-Term Budget Outlook" to resonate more strongly and
catalyze congressional action.
- First, the current recession has proven how important it is to
get and keep America's economy on track. America is in a period of
high unemployment, negative economic growth, and trillion-dollar
deficits. More trillion-dollar deficits will not get or keep
America's economy on a sustainable path, nor will they be tolerated
by the public, but that is precisely where the U.S. economy is
headed.
While debt levels at 300 percent of GDP would produce
unimaginable economic pain, the situation would be even worse than
CBO predicts. As debt levels increase, interest rates, too, must
increase in order to encourage more citizens or foreign governments
to buy up debt. However, CBO does not attempt to model interest
rate increases. Had CBO accounted for this, long-term deficit and
debt numbers would be far higher because rising interest rates
would drive net interest costs up further, driving deficits and
debt up even higher, driving interest rates up further, and so on
in a vicious cycle. As CBO states on page eight of the report: "If
debt actually increased as projected under either scenario,
interest rates would be higher than otherwise and economic growth
would be slower."[2]
- Second, the Obama Administration and Democratic congressional
leadership are poised to make the budget situation far worse with
proposals for new expensive federal programs, such as national
health care. While many policy goals may seem important in
isolation, they must still be paid for in the broader context of
the entire budget. Americans cannot afford to let Congress quietly
sweep this report under the rug; Congress must confront America's
budget situation openly and honestly before passing policies that
would make this bad situation worse.
Congress Has One Option: Entitlement
Reform
As CBO explains, the cause of the bleak outlook is clear: "Debt
soars (under either baseline) because of unrelenting growth in
federal spending on health care programs and a rise in Social
Security spending as a share of GDP, combined with a much smaller
increase in tax revenues."[3] Indeed, over the projection period these
retirement entitlements, which are already the largest pieces of
the budget, will more than double in size.
Unlike other spending, which will actually decrease
substantially over the projection period if stimulus spending is
phased out, entitlement spending is part of mandatory spending and
grows on autopilot. The automatic growth leads to exploding costs
due to rising health care costs and the fact that the 77 million
retiring baby boomers outnumber the workers who will support them
by a 2-to-1 ratio. Cutting an earmark here or raising a soda tax
there will be absolutely insufficient to overcome these pressures,
which is why CBO correctly admits that entitlement reform is the
only option.
Too Bad to Ignore
Now that Americans are all too familiar with the problems
associated with economic slowdowns and trillion-dollar deficits,
Congress ought to take the warnings issued in the CBO's "Long-Term
Budget Outlook" seriously. Adding new entitlements, such as
national health care, or ignoring the need to reform existing ones
while claiming to care about fiscal responsibility will be
disingenuous at best and economically debilitating at worst.
Nicola Moore is Assistant Director of
the Thomas A. Roe Institute for Economic Policy Studies at The
Heritage Foundation.