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The mid-term elections may be over, but our nation’s fiscal and economic challenges remain. Despite recent reductions in the federal deficit, more action is needed to put the nation on a sustainable long-term fiscal path and support a still-recovering economy.
Lawmakers have an opportunity to take advantage of the upcoming legislative deadlines to make progress on the nation’s fiscal health. While it is likely that the 113th Congress will address only its most pressing deadlines before final adjournment, the incoming Congress should strive to be more forward looking. By considering the country’s long-term interests today, Congress can strengthen the economy and reduce the cost of reform for future generations.
While recent improvements to the federal deficit are welcome, we have not solved our long-term fiscal problems. Consider the following widely-held misconceptions:
Myth: Deficits have fallen and our budget is in good shape.
Reality: Yes, there has been a welcome improvement in current deficits as compared to those during the recession, but it’s clear that the recent trend of declining deficits won’t last long. According to CBO’s projections, deficits will begin rising again in 2018. Large deficits result in the growth of national debt and, over the long term, hurt the economy by lowering investment levels, reducing national income, raising interest rates, and reducing wages.
Recent budget improvements only delay the rise of the nation’s long-term deficits and debt
Myth: Growth in healthcare costs is no longer a problem.
Reality: While the CBO has adjusted its projections on healthcare costs downward since 2010, the long-term trend remains troubling. Federal healthcare costs are still projected to climb by over 90 percent — from 5 percent of GDP in 2014 to over 9 percent of GDP in 2050. This cost growth results from the aging of the population, the rising cost of care, and the expansion of subsidized health insurance through Medicaid and the insurance exchanges.
Projections of federal healthcare spending have improved but are still climbing as a share of the economy
Myth: The economy has recovered and we can grow our way out of fiscal challenges.
Reality: The welcome economic growth we’ve seen in recent years certainly helps to improve our fiscal position, but growth is not likely to be enough to solve these long-term fiscal challenges. Using CBO’s alternative fiscal scenario, we estimate that the U.S. economy would have to grow about twice as fast as our projected growth rate each year for the next twenty-five years in order to fully fix the fiscal imbalances. That outcome is highly unlikely — it would require a constant level of high annual growth rates never before recorded in American history.
Lawmakers face a range of urgent fiscal tasks during the rest of the lame-duck session and over the coming months. These upcoming legislative deadlines present an opportunity for Congress to take action that would strengthen our economy and put the nation on a more sustainable fiscal path.
There is nothing to gain from a recurrence of the fiscal brinksmanship of recent years, which damaged the economy. In a study funded by the Foundation last year, Macroeconomic Advisers estimated that fiscal uncertainty from 2009 to 2013 raised unemployment by 0.6 percentage points — the equivalent of 900,000 lost jobs. Moreover, the longer we delay fiscal reforms, the more drastic the changes will have to be. Under CBO’s alternative fiscal scenario, we estimate taking action in 2015 to begin to stabilize the debt would require changes to revenue or spending of 3.4 percent of GDP. If action is delayed until 2025, this number climbs to 5.8 percent of GDP — a 70 percent increase.
Delaying action to stabilize the debt will make solutions harder in the long run
The approaching fiscal deadlines and the congressional budget process provide an opportunity for lawmakers to work through their differences, set priorities and work together on a sensible plan to address our long-term fiscal challenges. Addressing fiscal issues in a timely and proactive manner will help our economy, and our nation as a whole. By enacting a bipartisan plan that puts our long-term budget on a sustainable path, lawmakers could reduce uncertainty about our fiscal future, provide a much-needed boost to business and consumer confidence, and help our economy grow, now and in the future.