June 22, 2011
The long-term budget outlook released by the Congressional Budget Office Wednesday offered a sobering reminder of the long-term stakes in the debt ceiling negotiations now taking place on Capitol Hill.
In a word, the current path is unsustainable.
If Congress and the White House continue the stalemate as they have in recent years, where tax breaks never expire, health care spending continues its rapid growth, and military and domestic discretionary spending keep pace with inflation, the nation will face a debt-to-gross domestic product (GDP) ratio of 100 percent by 2021 and reach 190 percent by 2035. It’s 70 percent today, up from 40 percent just three years ago and it is still rising rapidly. The outlook is little changed from a year ago when CBO projected the deficit would reach 87 percent of GDP by 2020.
On the other hand, if the political powers in Washington simply do nothing for the next decade except raise the debt ceiling, allow all the Bush-era tax breaks to expire, let the alternative minimum tax hit a higher proportion of middle class households, and never fix physician salaries to make up for scheduled cuts, then the debt will stabilize at its current level and rise to about 84 percent of GDP over the next quarter century. While that would still be high by historical standards, it is below the 100 percent marker that some analysts say could be the tipping point where investors begin to flee government bonds.
Of course, the “do nothing” scenario requires letting tax collections rise from their current 15 percent of GDP to 23 percent, a move that even the non-partisan CBO director Douglas Elmendorf noted would require a major shift in the nation’s political mood. “The implications of this analysis are clear,” he wrote on the CBO blog. “There is a substantial mismatch between what the government would have to spend to maintain existing programs in their current form and the revenues that taxpayers are accustomed to providing the government to pay for those programs.”
Former CBO leaders said the latest projections confirm what has been articulated many times in the past year by Washington policy elites. They have coalesced around a consensus that bringing the nation’s long-term budget back toward balance will require a mix of tax increases and programs cuts. Even some former Republicans have articulated that view, although none who are currently in or running for high office.
The need for cuts is especially pronounced in health-related entitlement programs like Medicare, Medicaid and the Children’s Health Insurance Program, whose rapidly rising costs are the biggest drivers of the escalating long-term federal debt. Spending on health is slated to rise from 10 percent to 15 percent of GDP over the next 25 years, and that includes the savings that are scheduled to come with the new health care reform law, according to the CBO report.
Some analysts are more optimistic than CBO that the nation’s decades-long health care spending binge may be coming toward a close. “Innovations being undertaken in the private sector and those stimulated by various provisions of the Affordable Care Act could prove more successful than have been assumed,” said former CBO chief Robert Reischauer, president of the Urban Institute and a Medicare trustee, in testimony on Capitol Hill Wednesday. “With the private and public sectors working on the same problem and the provider communities more fully engaged, some optimism may be warranted.”
Yet many analysts have focused on major entitlement reforms in their plans to make a major dent in the long-term deficit projections identified by CBO. “The agenda has been laid out by the Bowles-Simpson plan (the president’s deficit commission, headed by former Sen. Alan Simpson, a Republican, and former White House chief of staff Erskine Bowles, a Democrat),” said Douglas Holtz-Eakin, the president of the American Action Forum and a former CBO chief who now consults for Republican candidates. “We have to cut spending and raise revenue through tax reform and the sooner that Congress and the administration get about the business of doing that, the better off we’ll be.”
But the ratio of budget cuts to revenue increases remains the biggest stumbling block in the debt-ceiling talks, especially when every top Republican leader on the Hill and everyone running for president are dogmatically insisting that tax increases cannot be part of the solution. Former Minnesota Gov. Tim Pawlenty has proposed capping government spending and taxes at 19 percent of GDP, which is the highest among active candidates. Yet that is only slightly above the 18.5 percent of GDP spending average of the past 40 years, even though 77 million Baby Boomers are likely to retire over the next 25 years and drive the nation’s elderly population to 20 percent of the total, up from 13 percent today.
“We’re in trouble,” said Roberton Williams, a senior fellow at the Tax Policy Center and a former CBO official. “We won’t bring in enough revenue to pay for all the things we say we’re going to do at that level.”
The failure of either side in the talks to compromise on issues seen as key for their political bases leads centrist leaders to predict the outcome of the debt-ceiling talks will be a partial solution that essentially postpones dealing with the long-term problems outlined in the CBO report. “There are four wheels on the car – taxes, entitlements, defense spending and domestic spending,” said Jim Kessler, vice president for policy at Third Way, a centrist think tank. “You can’t drive a car with three wheels, and so far taxes are off the table. There is going to be no compromise on entitlements until taxes are put on the table because Democrats are just not going to go there.”
Budget Deficit: Government Handouts Top Tax Income (The Fiscal Times)
Budget Deficit: GOP May Have to Bend on Taxes (The Fiscal Times)
Neocons Talk Deficit, but Won't Budget on Defense Cuts (The Fiscal Times)