January 26, 2011 | WebMemo on Budget and Spending
The new Congressional Budget Office (CBO) 10-year budget baseline shows a virtually unprecedented sea of red ink. The report reveals an unprecedented $1.5 trillion deficit in fiscal year (FY) 2011—an increase of $95 billion over their last 2011 estimate. This will be the third consecutive year of trillion-dollar deficits.
However, the baseline includes a number of unrealistic assumptions—assumptions that Congress requires the CBO to use—that skew the results. Once the baseline is scrubbed of these unrealistic assumptions, the more realistic baseline shows historic spending levels driving the budget deficit to $1.9 trillion by 2021. Over the next decade, deficits are projected to total $13.6 trillion.
Spending Drives Historic Debt
The CBO baseline contains two important messages. First, Washington is accumulating debt at an unsustainable rate. After the debt slowly grew to $5.8 trillion through 2008, the more realistic baseline shows the federal government adding an astonishing $19.1 trillion in new debt between 2009 and 2021—$140,000 per household over those 13 years.
Annual budget deficits would never drop below $1 trillion, as the debt is now projected to reach 100 percent of the gross domestic product (GDP) by 2020—and continue growing thereafter. This steep rise in debt would eventually become too large for global capital markets to absorb, potentially triggering a financial crisis, an interest rate spike, and gigantic tax increases.
The second message is that surging government spending—not low revenues—is driving long-term deficits. Recession-depleted tax revenues are scheduled to rebound to their historical average of 18.0 percent of GDP by 2018 and reach 18.4 percent by 2021—even if all tax cuts are made permanent. By contrast, federal spending (historically 20.3 percent of GDP) is projected to reach 26.4 percent of GDP by 2021.
This means that, beginning in 2018, rising budget deficits are entirely the result of above-average spending. For example, the 2021 budget deficit is set to exceed its historical average by 5.7 percent of GDP because rising revenues (0.4 percent of GDP above their historical average) will be dwarfed by surging spending (6.1 percent of GDP above its historical average). Spending is the moving variable.
Building a Baseline
Congress requires the CBO to include in its 10-year baseline the following assumptions: The 2001 and 2003 tax cuts and all other temporary tax cuts will expire, the Alternative Minimum Tax (AMT) will not be annually adjusted for inflation, and non-war discretionary spending will grow no faster than inflation through 2021.
As these are not realistic, the CBO provides “alternative assumptions,” which are used in this paper. They include the following assumptions:
Under this more realistic “current-policy” budget baseline, the budget deficit reaches $1.5 trillion in 2011, drops to $1.0 trillion by 2013, and rises back to $1.9 trillion by 2021—and even that assumes a return to peace and prosperity. Over the 2012–2021 decade, total deficits would reach $13.6 trillion.
General Budget and Spending Trends: A Look Back
General Budget and Spending Trends: Looking Forward
Deficits and Debt
Fundamental Reform Necessary
These spending and deficit trends are unsustainable. Historic increases in federal spending are set to create permanent trillion-dollar deficits, eventually pushing the national debt past 100 percent of the GDP. Without change, the nation could potentially face a Greece-like economic crisis.
This is unacceptable. Fundamental spending reforms are required to avert a budget crisis. Lawmakers should immediately bring non-defense discretionary spending down to 2008 or even 2006 levels. Next, they should enact tough spending caps to help lawmakers set priorities and make trade-offs. Then, Congress should disclose the massive unfunded obligations of Social Security, Medicare, and Medicaid and put those programs on long-term budgets. Finally, lawmakers should enact the necessary entitlement and programmatic reforms that can keep government within those limits.
These spending reforms may not be easy, but the alternative—record government debt and historic tax increases—is even worse.
Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
The previous FY 2011 deficit estimate (using a current-policy baseline) appeared in Brian Riedl, “New CBO Budget Baseline Shows That Soaring Spending—Not Falling Revenues—Risks Drowning America in Debt,” Heritage Foundation WebMemo No. 2983, August 19, 2010, at http://www.heritage.org/Research/Reports/2010/08/New-CBO-Budget-Baseline-Shows-that-Soaring-Spending-Not-Falling-Revenues-Risks-Drowning-America.
Past budget data comes from Office of Management and Budget, “Budget of the United States Government: 2011 Historical Tables,” at http://www.whitehouse.gov/omb/budget/historicals/ (January 26, 2011). Future projections were calculated by The Heritage Foundation using Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2011 to 2021,” January 2011, at http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf (January 26, 2011).
Adjusted for inflation.
For FY 2009, President Bush is assigned $1.186 trillion in deficit spending (the CBO estimate for FY 2009 when he left office), while the remaining $228 billion in 2009 deficit spending is attributed to President Obama.
See Douglas W. Elmendorf, Director, Congressional Budget Office, letter to Representative Paul Ryan (R–WI), June 30, 2009, at http://www.cbo.gov/ftpdocs/104xx/doc10416/RyanLetterInterestRates.pdf (January 26, 2010).
Congressional Budget Office, “The Long-Term Budget Outlook,” June 2010, at http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf (January 26, 2010) and supplemental data for Figure A-4, at http://www.cbo.gov/ftpdocs/115xx/doc11579/LTBO-2010data.xls (January 26, 2011). This represents the alternative fiscal scenario.
See Stuart M. Butler et al., “Taking Back Our Fiscal Future,” Heritage Foundation White Paper, March 31, 2008, at http://www.heritage.org/Research/Budget/wp0408.cfm. See also Alison Acosta Fraser, “The SAFE Commission Act (H.R. 3654) and the Long-Term Fiscal Challenge,” testimony before the Committee on the Budget, U.S. House of Representatives, June 25, 2008, at http://www.heritage.org/Research/Budget/tst062508b.cfm.
For proposals, see Brian M. Riedl, “A Guide to Fixing Social Security, Medicare, and Medicaid,” Heritage Foundation Backgrounder No. 2114, March 11, 2008, at http://www.heritage.org/Research/Budget/bg2114.cfm.