Latest CBO Report Paints Disturbing Picture For Future US Finances
Sometimes, it is just smarter (and easier) to let people who are smarter than you explain complicated things. Such is the case with Chuck Blahous, a long-time friend from Washington DC who is now a trustee on the Social Security and Medicare Trust Fund.
I was about to plow through the CBO update on long-term economic and budget projections that came out last week when I saw Chuck’s summary land in the email inbox: CBO reported that ‘deficits would fall below $1 trillion!’ for the first time in 4 years. People from the White House on down, including the President, seemed to want to bask in the warm sun of accolades and congratulations from an adoring public and news media for a ‘job well-done’.
This is premature celebration at best. Primarily because there are plenty of caveats and ‘what-ifs’ and ‘what-fors’ in the CBO report to make it highly unlikely that anything substantial has been accomplished in the first four years of President Obama’s tenure in the White House regarding the budget deficit.
Celebrating the $845 billion deficit is a lot like the fans of Western Kentucky storming the court in the First Four play-in games of the NCAA basketball tournament in 2012 after their scintillating late-game comeback over Mississippi Valley State. They got blasted by eventual champion Kentucky two days later.
Chuck has written an in-depth report about the CBO recent projections; his very good summary is below and hopes are it will shed some light on the larger CBO report that you should read yourself as well. It is only 72 pages; once you read it, you will know more about our budget deficit and debt problem than anyone you will listen to on talk radio or watch on cable TV.
#1: Federal debt is projected to grow faster than the economy can sustain. Federal debt has risen dramatically relative to our economic output. In President Bush’s last full year in office, federal debt was 40.5% of GDP. This year it’s 76.3%. CBO’s latest projections indicate that under current law not only will we fail to bring federal debt back to historical norms, but that it will ultimately rise faster than the economy can sustain.
#2: It’s probably worse than that. If lawmakers override Medicare physician payment cuts as they have in the past, and if they also extend certain expiring provisions of tax law as well as override the so-called “sequestration” spending cuts, federal debt will grow out of control even faster – reaching 87% of GDP by 2023 as opposed to the 77% shown.
#3: The problem is not a lack of tax revenue. By 2015 federal tax revenues will hit 19.1% of GDP, taking a tax bite from the economy well exceeding the historical average of about 18%.
#4: Spending is the problem. In 2009 federal spending jumped to a post-World War II high of 25.2%. It still remains far higher than historical norms and is projected to resume growing faster than the economy later in this decade. Unless this spending problem is fixed, Americans will be subjected to unprecedented levels of taxation, indebtedness or both.
#5: Projected spending growth is driven primarily by four programs. Spending growth is projected to resume rising faster than the economy in 2017, growing from 21.5% of GDP (a level already higher than historical norms) to 22.9% in 2023 and rising further thereafter. This projected spending growth is entirely attributable to growth in Social Security, the major federal health programs and interest on the national debt.
#6: The Social Security spending explosion is already hitting us. At first glance it might appear that future Social Security spending growth is significantly less of a problem than growth in the health entitlements. But this is partially an illusion borne of the fact that Social Security spending has already exploded over the last four years.
#7: Going forward, federal health spending is a huge problem. While Social Security has been the fastest-growing program in recent years, the biggest growth going forward will be in the federal health entitlements. Net costs for Medicare, Medicaid and “Obamacare” are expected to grow more rapidly than GDP going forward, from 4.9% of GDP today to 6.2% by 2023, faster than projected growth elsewhere in the budget.
#8: Controlling health cost inflation isn’t enough to fix the budget problem. Last year CBO estimated that over the next quarter-century, cost growth in the federal health entitlements and Social Security will be 75% attributable to population aging and only 25% to health cost inflation.
#9: Health care reform as enacted in 2010 made the problem worse, not better. CBO now projects that the law’s new health exchange subsidies will add $949 billion to federal spending from 2014–2023, while federal Medicaid costs will rise from $265 billion this year to $572 billion annually by 2023. One of the best things that can be done for the budget is to scale back expenditures scheduled under the 2010 health reform law.
#10: The fiscal strains caused by “Obamacare” may be underestimated. In its long-term budget outlook published last year, CBO warned that if lawmakers instead act in line with historical precedent and allow the new health exchange subsidies to grow in proportion to participants’ health care costs, then the program’s eventual cost will be much higher than now projected.
In sum, the CBO report paints a disturbing portrait of unsustainable federal debt accumulation driven by spending, and by entitlement spending in particular. To spare our children and grandchildren from unprecedented levels of taxation and/or indebtedness, entitlement reforms that slow these programs’ growth are desperately needed, the sooner the better.’
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