The latest long-term budget outlook from the Congressional Budget Office reads like a particularly dark noir: Things start out pretty bad. And then they get worse.
"Over the past few years," the report's first sentence explains, "the federal government has been recording budget deficits that are the largest as a share of the economy since 1945."
Before the year is out, debt held by the public — the federal government's outstanding debts to outside parties — will equal 70 percent of the total economy. That's not a pretty picture. And it's not likely to get better. It is a foregone conclusion that large entitlements, Medicare and Medicaid in particular, are destined to cost far more as a percentage of the economy due to the aging of the Baby Boomer generation, the rise in health costs, and long-term care expenses born by Medicaid. If today's laws are kept on the books, "spending on the major federal health care programs alone would grow from more than 5 percent of GDP today to almost 10 percent in 2037 and would continue to increase thereafter."
In a quarter century, entitlements, which currently account for about 10 percent of GDP, would alone chew up a full 16 percent of the economy. That would represent a massive historical shift: For the last four decades, the entire federal government, including entitlements, has consumed an average of 18.5 percent of the country's economic output. Relative to the size of today's economy, that would be like spending an extra $850 billion annually on entitlements. In a growing future economy, it will be far more.
Unless the federal government pursues substantial reforms to these programs, there is no way to avoid this. "Without significant changes in government policy," the CBO's report says, "those factors"—the aging of the population, Medicaid long-term care, rising health costs—"will boost federal outlays relative to GDP well above their average of the past several decades—a conclusion that holds under any plausible assumptions about future trends in demographics, economic conditions, and health care costs." On our current policy trajectory, in other words, historically unprecedented levels of spending, driven by entitlement costs, do not represent a possible future. They represent the only future.
Now, it's true that on our current policy trajectory, the CBO predicts only mild deficits: That's because current law schedules taxes to rise roughly in conjunction with those historically unprecedented spending levels. Current law also calls for reimbursement cuts for physicians that are almost certain not to go into effect and Medicare cost-containment schemes that the program's Trustees have indicated are unlikely at best.
That's why the CBO also releases an alternative budget scenario in addition to its current policy scenario. The budget office doesn't take a position on which scenario is more likely, but the alternative scenario assumes that rather than stick to current law, Congress behaves more or less as it has in the past. Call it the business as usual scenario.
Under the business as usual scenario, things get really bad. Or, as the CBO puts it, "The budget outlook is much bleaker" under the assumption that Congress will continue to legislate as it has in the past. For one thing, the fiscal picture for entitlements turns out to be even worse: "If lawmakers continued certain policies that have been in place for a number of years or modified some provisions of current law that might be difficult to sustain for a long period, the increase in spending on health care programs and Social Security would be even larger," the report says.
Debt and deficits explode as well, with debt held by public running up to 200 percent of GDP by 2032. In twenty-five years, in other words, America could owe outside lenders twice the value of its annual output. And even those ugly figures don't capture the full impact of exploding debt. The CBO warns that those projections "understate the severity of the long-term budget problem under the extended alternative fiscal scenario because they do not incorporate the negative effects that additional federal debt would have on the economy." Mountain-size deficits would decrease savings rates and lead to higher interest rates, more foreign borrowing, and decreased investment domestically. Debt, then, becomes a major drag on the economy. CBO estimates that increased debt levels would reduce gross national product by roughly 4 percent in 2027 and by 13 percent in 2037. That's a big economic burden. We wouldn't just owe more. Our debt would own us more.
All this, of course, is contingent on Congress continuing to act like Congress. But although business as usual may be the most familiar option, it isn't the only one. With significant changes, especially to entitlements, the budget outlook could be substantially different, even better. But if federal policymakers keep delaying action, the fiscal outlook will remain worryingly dark: Budgepocalypse now, budgepocalypse forever.
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