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New CBO Projections Undercount Long-Term Deficit

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New CBO Projections Undercount Long-Term Deficit

April 11, 2017

The Congressional Budget Office (CBO) recently released its annual thirty-year budget projections that once again show how unsustainable entitlement costs threaten to bury taxpayers.

Low taxes are not the problem. Total revenues – which have averaged 17.4 percent of the Gross Domestic Product (GDP) over the past fifty years – will continue growing to 19.6 percent of GDP over the next thirty years. That will be the highest sustained tax level in American history. Within 15 years, taxes paid by families and small businesses will surpass 10 percent of GDP for the first time ever and then continue growing thereafter.

The problem is spending. After averaging 20.3 percent of GDP over the past fifty years, CBO projects that federal spending will soar past 29 percent of GDP over the next three decades, and push the national debt to 150 percent of GDP.

In today’s economy, this is the equivalent of combining a $350 billion revenue increase with a $1,700 billion spending hike to push the yearly budget deficit from $559 billion to $1,877 billion.

This national debt, which has already doubled to $20 trillion since 2008, would run ten-year deficits over the next three decades of $10 trillion, $22 trillion, and then $45 trillion, bringing the total national debt above $90 trillion.

And this is the rosy scenario.

The CBO baseline assumes no recessions, wars, or terrorist attacks for the next thirty years. It assumes that Congress and the President never expand entitlement benefits or cut taxes. Instead, 100 percent of this unsustainable red ink would result from the cost of providing 77 million retiring baby boomers with the Social Security and Medicare benefits that have already been promised, as well as the cost of other health entitlements like Medicaid and ObamaCare, and finally, interest on the expanding national debt.

This rosy scenario likely under-estimates the cost of government.

On the mandatory spending side, CBO assumes that Medicare per-beneficiary costs (which have finally begun slowing) will continue decelerating for the next 30 years. And CBO’s projected 2047 spending level for Medicaid, CHIP, and ObamaCare subsidies has fallen by one-fifth since its 2012 baseline report. Finally, CBO assumes that spending on entitlements outside of Social Security and health care will drop by one-fifth (as a share of the economy) between 2016 and 2047.

On the discretionary spending side, CBO assumes that even after the Budget Control Act (BCA) “sequestration caps” expire in 2021, defense spending will continue falling to 1930s levels, and non-defense spending will plummet one-third below its long-term average.

If these projections prove optimistic, and spending levels (as well as health care per-beneficiary costs) return to typical levels, it would add an additional 5.4 percent of GDP to spending levels by 2047 – the equivalent today of $1 trillion in annual spending above the already-high projections. That would push 2047 spending to nearly 35 percent of GDP and add $45 trillion more to the thirty-year debt.

Perhaps most implausibly, CBO assumes that Washington will build a $92 trillion national debt by 2047 without triggering any significant increase in interest rates (which would raise Washington’s interest payments on this large debt).

Basic economics tells us that higher demand brings higher prices. If Washington demands to borrow a staggering $92 trillion from the financial markets to cover its debt, the price of borrowing money (the interest rate) should grow substantially – even after accounting for financial markets being larger in 2047.

The interest rate on the ten-year Treasury bond (which nearly matches the combined interest rate Washington pays on its debt) averaged 10.5 percent in the high-inflation 1980s, 6.6 percent in the balanced-budget and low-inflation 1990s, and 4.5 percent in the recessionary and “easy money” 2000s.

And yet, despite the Federal Reserve raising interest rates, an economy (hopefully) escaping a lost decade of weak growth, and Washington borrowing an additional (and unfathomable) $77 trillion more in 30 years – CBO assumes the interest rate on the ten-year bond will never top 4.7 percent.

More likely is a vicious circle whereby a bloated national debt raises interest rates, which forces Washington to borrow more to make the rising interest payments, which in turn hikes interest rates even further.

How much could this cost? My budget model assumes that an average interest rate modestly rising to 7 percent by 2027 would add $55 trillion (!) in new net interest costs over the subsequent 20 years. The national debt would reach $147 trillion in three decades, or 240 percent of GDP. If combined with the higher program spending levels described earlier, the additional cost would reach $100 trillion.

At a certain point, these numbers become too large to comprehend. The economy and the financial markets would collapse long before the debt reached these levels. In fact, CBO used to publish a 75-year baseline, but the projected national debt grew so large that CBO could not even model a functioning economy.

And that is the scariest part of all. Even a vanilla baseline that assumes little more than current spending levels plus all promised Social Security and health benefits shows eventual national bankruptcy due to those entitlements.

The real question is: will Congress and the President courageously enact the necessary reforms to avert this predictable crisis?

Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl.

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