News Alert: Federal Budget on Unsustainable Path
New CBO Report Shows Rising Health Care
Costs Could Lead to Higher Taxes, Greater Debt
A report from the Congressional Budget Office (CBO) shows that the current federal budget will force the national debt to continue to grow much faster than the economy over the long run. Rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly, assuming the continuation of current policies regarding health care entitlement spending (Medicare and Medicaid), and Social Security. CBO based its findings on two plausible scenarios and issued a dire forecast.
Robert Sunshine, CBO's Deputy Director, said, "Unless tax revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States."
What's at stake is nothing less than the health of the U.S. economy. Dave Walker, President and CEO of the Peter G. Peterson Foundation, said, "This latest CBO long-term budget projection provides clear and compelling reasons to take action now. Our federal financial house is in poor and deteriorating condition and it's already mortgaged for more than it's worth. We need to start reconstructing it and make sure that we will be able to make our current and future mortgage payments when due. The time to start is now."
The nation's deficits and debt could reach levels that would not only harm the economy but require two unpopular actions: substantial tax increases, big spending cuts or both. CBO suggests implementing these actions sooner rather than later in order to prevent more economic erosion.
The three largest entitlement programs-Medicare, Medicaid, and Social Security-will drive federal spending (other than interest on the debt) in coming decades. Robert Sunshine says, "If current laws do not change, federal spending on Medicare and Medicaid combined will grow from almost 5 percent of GDP today to almost 10 percent by calendar year 2035 and to more than 17 percent of GDP by 2080. By 2080, if there are no changes in policy, the federal government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years."
The report says slowing health care costs are the "central long-term challenge for federal fiscal policy." Many health care reform proposals seek to reduce the costs of Medicare and Medicaid entitlement programs. But they then propose using the savings to expand coverage to the uninsured. As CBO pointed out in a June 16 letter to Budget Committee Chairman, Senator Kent Conrad, and Ranking Member, Senator Judd Gregg, "...any savings in existing federal programs that were used to finance a significant expansion of health insurance would not be available to reduce future budget deficits." So-called "deficit neutral" health care reform would leave the budget on its current unsustainable long-term path.
The CBO report represents a significant deterioration in the budget's outlook since the last long-term report, which CBO issued in December 2007 (see chart below). The latest projections show how much the recession and the financial crisis has damaged the budget's long-term position.
