The long-term budget outlook for the United States is grim, according to the new report from the Congressional Budget Office. In the baseline scenario, federal spending will approach 30 percent of GDP before midcentury, far outpacing moderate revenue growth. This growing imbalance will fuel annual deficits and add to the already sizable debt load, which will almost double to a record 150 percent of GDP by 2047.
This fiscal path is simply not sustainable, and the federal government will have to enact substantive reforms before this comes to pass. If reform is delayed, there will be fewer options available and the needed changes will be bigger. Policies that bring back more robust economic growth can help, but are no substitute for changes to entitlement programs that are driving the growth in spending.
In line with previous iterations, the new CBO report shows that the spending growth is primarily driven by entitlement spending and the net interest payments resulting from increasing debt . Spending on major health care programs, including Medicare, Medicaid and ACA subsidies, will almost double from an already sizeable 5.5 percent of GDP to 9.2 percent by 2047. Security grows from 4.9 percent to 6.3 percent. Net interest payments would more than triple, from 1.4 percent of GDP to 6.2 percent. All other noninterest spending declines from 8.9 percent to 7.6 percent over this period.
The projections are influenced by CBO’s assumptions. If interest rates depart from the projection, this would significantly alter the net interest payments. In this projection, the federal government would largely become a system for funneling transfer payments to the elderly and making sizeable interest payments accrued by high debt levels.
Budgetary pressures could crowd out other priorities such as national defense. Allowing debt to reach these levels would have serious negative consequences for the American economy. By 2035 debt will reach the highest level on record, eclipsing even the levels seen in World War II. CBO projects it would continue to surge to ever-higher levels in the years thereafter.
High and rising debt would reduce investment, leading to higher interest rates and a poorer country. Under the baseline scenario, by 2047 GDP would be 3 percent lower and average income per capita would be $4,000 lower. Debt at these levels would bring about serious economic harm and leave all Americans worse off.
Things that are unsustainable, by their nature, will not continue as they are, an often-quoted saying by the late economist Herbert Stein. Some kinds of reforms to place the country back on sound budgetary ground will have to be undertaken at some point.
Will they be thoughtfully planned in a way that addresses the underlying source of the imbalance, minimizes disruption, and targets areas of government inefficiency and ineffectiveness?
Just to maintain public debt at the same share of GDP, non-interest spending would have to be cut by nine percent each year. Alternatively, policymakers could increase revenues by 10 percent each year, equivalent to a $1,300 tax increase on households in the middle fifth of the income distribution.
The costs of delay are large. If policymakers wait a decade to finally get started on reform, the changes would have to be more than 50 percent larger. Tax increases of this magnitude would slow economic growth and be a serious hardship for American families.
Sensible cost containment reforms for Social Security could relieve some of this pressure without imposing sudden or significant changes: shifting to the chained CPI to calculate cost of living increases, gradually phasing in an increase to the normal retirement, and alter the benefit formula so the highest-income people do not see their benefits grow quite as fast. Modernizing the eligibility criteria and work limiting provisions in the disability program could restrain growth in caseloads and help more participants re-enter the workplace to the extent they are able.
Introducing more choice and competition into the Medicare program by introducing a premium support system would give seniors control over their health care while bending the cost curve. Per-capita spending caps for Medicaid could rein in excess cost growth by giving states greater flexibility to tailor their programs to the needs of their populations.
Policymakers should pursue these reforms to help resolve the country’s long-term fiscal problems, and they should do it soon.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes.
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