The nation’s budget outlook is daunting.
Without significant policy changes, an aging population and rising per capita health care costs will lead to surging federal debt, according to Congressional Budget Office’s (CBO) latest Long-Term Budget Outlook.
If revenues remain at their historical average share of gross domestic product (GDP), such spending growth would cause federal debt to grow to unsustainable levels.
Options – If policymakers are to put the federal government on a sustainable budgetary path:
- Revenues will need to increase substantially as a percentage of GDP; or
- Spending will need to decrease significantly from projected levels;
- there will need to be some combination of those two approaches.
In keeping with CBO’s mandate to provide objective, impartial analysis, its report makes no recommendations.
The CBO however does not talk around what it believes to be some major concerns and/or aspects of our fiscal situation that needs to be taking into consideration.
Some highlights from the report:
- At the end of 2008, federal debt equaled 40 percent of GDP (a little above the 40-year average of 37 percent). By the end of 2011, debt will reach roughly 70 percent of GDP—the highest percentage since shortly after World War II.
- The sharp rise in debt is partly from lower tax revenues and higher federal spending related to the recent severe recession—however, growing debt is also due to an imbalance between spending and revenues that predated the recession.
- The budget outlook for the coming decade and beyond is daunting with the retirement of the baby-boom generation bringing a significant and sustained increase in costs from Social Security, Medicare, and Medicaid.
- The most positive outlook
If there is no major changes in law — the Extended-Baseline Scenario — activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II. Debt would continue to rise however due to the major mandatory health care programs, Social Security, and interest on federal debt. Federal debt held by the public would grow from an estimated 69 percent of GDP in 2011 to 84 percent by 2035.
- Bleak and Sudden Crisis
The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur. These include 2001’s tax cuts being extended; the reach of the alternative minimum tax (AMT) restrained to stay close to its historical extent; Medicare’s payment rates for physicians staying at current levels (rather than declining by about a third, as under current law); and tax law changing so that revenues remain near an average of 18 percent of GDP. Under those policies, federal debt would grow much more rapidly than under the extended-baseline scenario. With debt held by the public exceeding 100 percent of GDP by 2021.The real danger in the CBO’s assessment: “… the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2023 and would approach 190 percent in 2035.”
Rising levels of debt also have other negative consequences that are not incorporated in those estimated effects on output:
“Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would confront policymakers with extremely difficult choices. To restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.”
Read the CBO’s 2011 Long-Term Budget Outlook for yourself.