Long Term Budget Projections at Unprecedented and Intolerable Levels

The Committee for a Responsible Federal Budget has an interesting report on the Long Term Budget Outlook as reported by the Congressional Budget Office. Let's take a look.

Last week, the Congressional Budget Office (CBO) released its Long-Term Budget Outlook. The reports suggests a brief window in which deficits subside a bit, after which the effects of health care cost growth and population aging will drive them rapidly upward and bring the national debt to unprecedented and intolerable levels.

Under current law, CBO projects debt held by the public will rise from less than 40 percent of GDP before the economic crisis to nearly 100 percent by 2040 and 300 percent by 2083. If current policies are continued, CBO projects the debt will rise to 100 percent by the early 2020s, to 200 percent before 2040, and eventually to 750 percent.

Ultimately, revenue increases and/or spending cuts will be necessary to prevent “a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.”

Ever-Growing Deficits

If we continue on our current path, according to the CBO, deficits will persist and grow, driving public debt to untenable levels. The CBO makes two sets of long-term projections: the “extended baseline scenario,” which essentially assumes current law, and the “alternative fiscal scenario,” which assumes policy makers continue a number of current practices such as maintaining physicians payments in Medicare, continuing to patch the Alternative Minimum Tax, renewing the 2001/2003 tax cuts, and allowing discretionary spending to grow with GDP rather than inflation over the next decade.



Rising deficits are caused by spending growing considerably faster than revenue. Projected spending increases come mainly from the growth of Medicare and Medicaid, and to a lesser extent Social Security.

Although a relatively small portion of our budget today at 1 percent of GDP, interest on the debt would grow to consume 12 percent of GDP by 2080 under CBO’s baseline scenario or 30 percent under its alternative scenario. Of course, even the baseline scenario displayed below would be unlikely to occur, since investors and lenders would not allow the United States to accumulate such high levels of debt. But this projection represents the magnitude of the gap that must be closed.



Ultimately, the long-term budget outlook will necessitate serious tax and spending changes. Absent such changes, we face the real threat of a fiscal and economic crisis more severe than what we've already endured.

There are more interesting charts in the article including one on Factors Impacting Growth of Medicare, Medicaid, and Social Security.

To say that the present course is unsustainable is putting it mildly. Spending cuts are mandatory. However, neither the Obama administration nor Congress has gotten the message. Nor has the Free Lunch Society of which Paul Krugman is the high priest.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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