Report: Long-term budget issues present fiscal threat to U.S.

National Debt

TL;DR version: This is a pretty long post dealing with a subject that generally fascinates only those interested in fiscal policy. The short of what you need to know is that the CBO expects the economy to perform better in the short-term, with higher revenues and lower budget deficits. But the rising costs of entitlements and the cost of servicing the national debt will drive up spending substantially over the long-term with the public’s share of the national debt becoming equal to the size of the economy (or GDP). As if the baseline scenario isn’t concerning enough, the alternative fiscal scenario is even more of a disaster. All charts below come directly from the CBO’s report.

Forget Syria or the still ongoing war on terrorism. The real security threat is the national debt. That’s what Admiral Mike Mullen warned in 2010. Those words still ring true today, especially after reading the latest long-term budget projections released yesterday by the Congressional Budget Office (CBO).

The annual report presents the federal budget outlook for the next 10 years (2013-2023) as well as provides a look into long-term projections relative to both current law and alternative scenarios, the latter of which most economists believe present a more realistic view of the United States’ fiscal health.

CBO Director Doug Elmendorf told reporters yesterday that the “federal budget is on a course that cannot be sustained indefinitely.”

“[T]he upward pressure on federal spending relative to the size of the economy comes not from a general growth in the size of the government, but from growth in just a handful of the largest programs — Social Security, Medicare, and Medicaid, along with the rising costs of servicing the government’s debt,” he said in his opening statement on the report.

The CBO anticipates that federal budget deficits will decline to 2% of gross domestic product (GDP) by 2015, down from a post-recession high nearly 10% in 2009 and almost 4% this year, and the public’s share of the national debt as a percentage of GDP will fall to 68%.

In 2013, the budget deficit and national debt are expected to be nearly 4% and 73% of GDP. But by the end of the 10-year budget window, these numbers will begin to rise again, which shows a long-term trend of severe unsustainability.

“By 2023, CBO projects, the budget deficit would grow to almost 3½ percent of GDP under current law, and federal debt held by the public would equal 71 percent of GDP and would be on an upward trajectory,” notes the CBO report.

How much of an “upward trajectory”? The report anticipates spending as a percentage of GDP to rise to 26.2%, based on current law, and federal revenues will come in around 19.5%. The budget deficit as a percentage would be 6.4% and the public’s share of the national debt will hit 100%, the point at which the United States could experience a sovereign debt crisis similar to that experienced in the Eurozone.

 Federal Debt Held by the Public (Baseline)

The CBO blames major entitlements — Medicare, Medicaid, and Social Security, spending for which will account for 14.2% of GDP by 2038 — for the rise in spending. Once you add in the interest on the national debt, mandatory spending in 2038 would be just over 19% of gross domestic product.

Putting that into perspective, spending as a percentage of GDP will come in just under 21% this year, while revenues will hit around 17%. Spending on major entitlement programs is, currently, 9.6%.

Spending and Revenues Under CBO's Extended Baseline, Compared With Past Averages

Notice in the chart above that tax revenues as a percentage of GDP are expected to be higher by 2038, which undermines the narrative that deficits are byproduct of lower tax rates. The deficits the CBO anticipates and the subsequent spike in the national debt is a result of out of control entitlement spending.

The CBO explained that growing such a large national debt would crowd out private investment, thus reducing economic output and income, and result in higher debt service payments. The kicker from the report is that the “risk of a fiscal crisis — in which investors demanded very high interest rates to finance the government’s borrowing needs — would increase.”

The scenario presented above is troublesome enough on its own. But the CBO also went over the alternative fiscal scenario, which is, as noted at the beginning of the post, a clearer measure of what the country can expect down the road.

“Under one set of alternative policies, referred to as the extended alternative fiscal scenario, certain policies that are now in place but that are scheduled to change under current law would continue instead, and some provisions of current law that might be difficult to sustain for a long period would be modified,” the report explained.

Under this scenario, the CBO expects that federal budget deficits would be $2 trillion higher over the next 10 years and “rapidly growing amounts” by 2038.

“The harmful effects on the economy from the resulting increase in federal debt would be partly offset by lower marginal tax rates. Nevertheless, in the long run, output would be lower and interest rates would be higher under that set of policies than under the extended baseline,” the CBO report explained.

“With those economic changes incorporated, federal debt held by the public would reach about 190 percent of GDP by 2038,” the report added [emphasis placed].

 Federal Debt Held by the Public (Alternative)

The CBO report serves as a warning for President Barack Obama and lawmakers, who have yet to come to any agreement on how to approach entitlement reform, which, again, is the true driver of federal spending. Very real reforms will must be enacted to make these programs sustainable while, at the same time, ensuring that Americans can prosper.

Kicking the can down the road, which has served as the status quo, isn’t an option because of the harmful affects it will have on the economy and, by extension, the American people.

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