CBO Fires Warning Shot About Unsustainable Budget Path
Policy + Politics

CBO Fires Warning Shot About Unsustainable Budget Path

President Obama’s deficit commission began a marathon of public hearings today, as the Congressional Budget Office released a bleak new assessment of the federal government’s “unsustainable” budget path over the next two decades.

The report underscores how the health care reform law should help reduce long-term deficits if Congress sticks with the plan; but health care costs are still the biggest threat to the government’s future fiscal stability. It also once again highlights how costly it will be to extend most of the Bush administration tax cuts, as most members of Congress want to do.

Under its “baseline’’ scenario, which assumes that current law remains unchanged and that all of former President George W. Bush’s tax cuts expire at the end of this year, federal debt will balloon to 80 percent of the nation’s economy by 2020, from about 62 percent of the gross domestic product at end of this year — and keep climbing after that.

Though economists are uncertain about how much debt the government can handle before financial markets begin to rebel, many contend that the debt burden would begin to crimp economic growth by the time it reaches 90 percent of GDP.

But CBO’s more chilling projection is its “alternative scenario,” which assumes that most of the Bush tax cuts will be extended and that the Alternative Minimum Tax will be preserved at current levels. The AMT, which blocks higher-income households from using many tax breaks, is expected to affect millions of additional families under current law. But Congress freezes the tax every year, and lawmakers are expected to continue doing so.

The alternative scenario also assumes that Congress eschews some of the cost-containment measures of health care reform after 2020. Under this “alternative’’ scenario, revenues would remain stagnant at 19 percent of GDP while spending climbs to 23 percent of GDP by 2030. Federal debt would balloon to 87 percent of the total economy by 2020 and soar even more rapidly after that.

“Keeping deficits and debt from growing to unsustainable levels would require raising revenue as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections or some combination of those two approaches,’’ the agency said.

The report echoes warnings that CBO has made repeatedly in recent years, but it offers fresh light on what all agree is the government’s single biggest looming budget problem: soaring health care costs.

The report notes that “mandatory’’ health care spending through Medicare for the elderly and Medicaid for the poor will increasingly swamp the rest of the budget as the nation’s baby-boomers reach retirement age. Even with enactment of health care reform legislation, which includes measures to reduce the rise in medical costs over the long term, CBO predicted that health care spending will climb to 10 percent of GDP by 2035, up from 5 percent of GDP today. Social Security, the other big old-age benefit program, will increase much more slowly, to 6 percent of GDP in 2030 from 5 percent today, and is likely to stabilize after that.

To put those numbers in perspective, spending on mandatory health care and Social Security — 16 percent of GDP — would consume almost as much of the nation’s resources by 2035 as the government’s spending on all programs has averaged over the past 40 years.

In one bit of good news, the CBO report predicts that the Obama health care reforms could start to reduce health care spending after 2020 — but only if the government follows through on the new law’s measures to increase efficiency.

Sen. Kent Conrad , D-N.D., chairman of the Senate Budget Committee and a member of Obama’s deficit commission, said the CBO report reinforces the urgency of the commission’s mandate to agree on a deficit-reduction plan. But Conrad also warned that cutting the deficit too quickly could cripple the fragile economic recovery.

“We must be careful not to disrupt the nation’s economic recovery as we pivot to deficit reduction,’’ Conrad said in a statement. “ The federal response to the economic crisis of 2008 and 2009 has succeeded in pulling us back from the brink. But the economy still faces strong headwinds. We need to avoid the mistake of the 1930s, when recovery measures were pulled back too quickly and the Great Depression was prolonged.”