CBO: Long-Term Budget Outlook Worse than Last Year

Jul 12, 2016

In its 2016 Long-Term Budget Outlook, the nonpartisan Congressional Budget Office (CBO) warns that federal debt is on an unsustainable path. Under current law, federal debt is now projected to reach 141 percent of gross domestic product (GDP) within 30 years. Unless policymakers act, CBO concludes that rising debt could jeopardize long-term economic growth, crowd out critical public investments, reduce policymakers’ flexibility to respond to unforeseen events, and raise the risk of a fiscal crisis.

The long-term budget outlook has deteriorated significantly since last year, when CBO projected debt would reach 111 percent of GDP in 30 years under current law. This deterioration stems largely from the enactment of legislation at the end of 2015 that made a number of temporary tax provisions permanent.

In the new report, CBO finds that:

  • Federal debt is projected to climb to 141 percent of GDP under current law by 2046.
  • Rising debt is a result of a structural imbalance between revenues and spending: under current law, spending growth, which is fueled primarily by the aging of the population and growing healthcare costs, significantly outpaces the projected growth in revenues.
  • As the debt grows and interest rates rise, interest costs are projected to increase rapidly: by 2022, they could exceed what the federal government has historically spent on R&D, infrastructure, and education combined, and could exceed them by more than two times by 2046. In fact, over the next 10 years, the federal government will spend $5.8 trillion on interest.
  • Rising debt will harm our economy and slow the growth of productivity and wages. On our current path, the annual income loss for a 4-person family would be $12,000 by 2046, on average.

Significant changes to spending and tax policies are necessary to put our long-term debt on a sustainable path. CBO’s report concludes that taking action now to address these trends would provide significant benefits; as CBO states, “Reducing the deficit sooner would have several benefits — less accumulated debt, smaller policy changes required to achieve long-term outcomes, and less uncertainty about what policies lawmakers would adopt.”

The National Debt Is on an Unsustainable Path

CBO estimates that federal debt, which is already at high levels, will climb significantly over the next 30 years. In CBO’s latest projections, debt is expected to climb from 75 percent of GDP in 2016 to 141 percent of GDP in 2046, based on current law.

Debt at those levels would be unprecedented. Over the past 50 years, debt has averaged only 39 percent of GDP and, as recently as 2007, it was as low as 35 percent of GDP. Since 1790, our debt has never exceeded 100 percent of GDP, except for a brief time during World War II when it peaked at 106 percent, after which the debt fell rapidly as a share of GDP.

The long term outlook has substantially deteriorated since last year

Rising National Debt Will Harm Our Economy

Absent reforms, our growing debt will have serious and far-reaching economic consequences for American families. CBO warns that these levels of debt:

". . . would have negative long-term consequences for the economy and would constrain future budget policy. In particular, the projected amounts of debt would: reduce national saving and income in the long term; increase the government’s interest costs, putting more pressure on the rest of the budget; limit lawmakers’ ability to respond to unforeseen events; and make a fiscal crisis more likely."

On our current path, rising debt would reduce real (inflation-adjusted) income for a 4-person family by $12,000 on average, in 2046. This represents a 3.4 percent loss in income, compared to stabilizing the debt.

The growing federal debt would reduce family incomes substantially

Why Does the National Debt Grow So Much?

The growth of our debt stems from a fundamental imbalance between spending and revenues. Under current law assumptions, CBO anticipates that federal spending will grow from 21.1 percent of GDP in 2016 to 28.2 percent of GDP in 2046. Revenues are also projected to increase during this period, growing from 18.2 percent of GDP in 2016 to 19.4 percent in 2046, but not nearly enough to match the projected growth of federal spending.

The growing debt is caused by a structural mismatch between spending and revenues

Social Security and the federal government’s major healthcare programs account for 100 percent of the projected growth in non-interest spending (as a percentage of GDP) over the next 30 years, under current law. Healthcare by itself accounts for approximately 70 percent of this growth.

Spending on these two budget categories is projected to grow from 10.4 percent of GDP in 2016 to 15.1 percent of GDP in 2046, nearly a 50 percent increase. By contrast, spending on all other categories of the budget, which include critical areas such as national defense, transportation, law enforcement, and public health research, is projected to decline as a percentage of GDP from current levels.

Healthcare is the major driver of the projected growth in federal spending over the long term

What Drives the Growth of Government Spending?

The growth of spending on Social Security and major healthcare programs is driven by two key factors: the aging of the population and the growth of healthcare costs per capita. Aging of the population is the most significant factor driving spending over the next 30 years. The aging is the result of baby boomers entering retirement years, combined with increases in longevity. The number of people aged 65 and older is projected to increase from 49 million in 2016 to 85 million in 2046. Within 30 years, one fifth of the adult population will be 65 or older. These trends will put significant pressure on the federal budget by driving up spending on entitlement programs that primarily serve older populations, such as Social Security, Medicare, and Medicaid.

The elderly population is growing rapidly and living longer

Growing healthcare costs per enrollee also plays an important role in driving spending over the next 30 years. Although healthcare costs have grown less rapidly in recent years, in part because of the overall economic slowdown that began with the Great Recession, CBO projects that per-enrollee healthcare spending will continue to grow at a faster pace than GDP per capita. This growth will put upward cost pressure on the federal government’s two major healthcare programs: Medicare and Medicaid.

The Growing Burden of Interest Costs

As federal debt increases, interest costs will impose a growing burden on the federal budget and could crowd out the funding of important priorities. CBO projects that interest payments on the debt will climb from 7 percent of federal spending in 2016 to 21 percent in 2046. By 2022 CBO projects that interest costs alone could exceed what the federal government has historically spent on R&D, nondefense infrastructure, and education combined. By 2046, interest costs are projected to be more than double the historical spending on those investments, as a share of GDP.

By 2046, interest costs are projected to be more than two times what the federal government has historically spent on R&D, infrastructure, and education combined

Now Is the Time to Act

CBO’s long-term budget outlook has grown even more alarming since last year. With federal debt on such an unsustainable path, now is the time to make sensible decisions that will improve America’s long term fiscal outlook. By taking action now, Congress and the President can lay a better foundation for future generations that allows greater investment, promotes stronger economic growth, and assures a more secure safety net.

Taking action now would provide time for reforms to be implemented gradually, giving Americans time to adjust to the policy changes. The longer we wait, the more difficult it will be. Under current law, CBO estimates that for federal debt in 2046 to be no higher than its current share of GDP (75%), we would need to cut noninterest spending or raise revenues by 1.7% of GDP per year starting in 2017. However, if we waited 5 years to act, the size of these required reforms would grow by nearly 25%.

Waiting 5 years raises the cost of stabilizing the debt by nearly 25%

In the short term, putting the debt on a long-run sustainable path will reassure financial markets, boost economic confidence, reduce uncertainty, and reduce fiscal burdens on future taxpayers. Policymakers can help today’s economy by agreeing on a comprehensive plan to stabilize the debt. Over the long term, a stable fiscal policy would raise wages, bolster family incomes, and enable a more prosperous future.

No American wants a future in which our economy is saddled with debt, starved of investment, and struggling to grow. Only with a fiscal outlook that is stable and sustainable can we ensure that we have sufficient resources to invest in our future.

Read the Statement from the Peterson Foundation on CBO’s 2016 Long-Term Budget Outlook.

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