WASHINGTON -- The Concord Coalition said today that new projections by the Congressional Budget Office (CBO) clearly demonstrate the growing budgetary challenges of an aging population and the need to confront hard policy trade-offs. With such trade-offs, the budget can be brought back into balance. Without them, deficits will persist and grow worse over the coming decade -- even assuming a strong economy.
“The good news in today's report is that the budget could be brought back into balance as soon as 2012 and remain in balance through 2016 if Congress and the President follow current law. The bad news is that they seem to have no intention of following current law. Instead, they seem intent on pursuing tax and spending policies that will drive the budget far deeper into deficit rather than return it to balance,” said Robert L. Bixby Executive Director of The Concord Coalition.
The new CBO report shows a gradual improvement in the budget's outlook over the next decade even as the baby boom generation begins to retire. This deceptively benign outlook is not because spending on health care and retirement programs is held in check. To the contrary, between 2006 and 2016 the cost of Social Security, Medicare, and Medicaid will increase by 24 percent--from 8.7 to 10.8 percent of GDP. As a result, these three programs, which consumed 42 percent of federal spending in 2005, will consume 56 percent by 2016. The reason for the baseline improvement is that it assumes policymakers will hold discretionary programs, including defense, to just 2 percent growth annually -- as opposed to 8 percent last year and a 5.2 percent annual average rate from 1994 through 2004 -- and that they will not enact new legislation to extend any expiring tax cuts or provide relief from the Alternative Minimum Tax (AMT).
“These assumptions will severely test lawmakers' ability to make the necessary trade-offs. If Congress and the President want to achieve the favorable result shown in the baseline, they will have to choose among priorities. The CBO baseline shows that they can fully fund all entitlement promises for the coming decade and still balance the budget if they sharply curtail other spending and allow the tax cuts to expire on schedule. If Congress and the President choose to extend all of the tax cuts, they will need to sharply curtail entitlement spending -- far more than the $99 billion of savings in the pending reconciliation bill -- and maintain tight limits on discretionary spending in order to achieve a balanced budget. Anything else leads to large and growing deficits,” Bixby said.
The Concord Coalition released an alternative baseline scenario using plausible policy assumptions based on recent trends and legislative proposals. It shows a very different picture than the official baseline. Assuming that appropriations rise at the same rate as economic growth (GDP), not inflation, and that funding for operations in Iraq and Afghanistan will slow gradually from 2006 and that relief from the AMT is extended, CBO's 10-year baseline deficit grows from $832 billion to $3.1 trillion. If all expiring tax provisions (including the 2001 and 2003 tax cuts) are made permanent along with these other changes the 10-year deficit grows to $5.3 trillion.
“When Congress and the President begin work on the FY 2007 budget next month they should observe the warning signs in CBO's report -- specifically that spending pressures will begin to ratchet up substantially by the end of the decade as the baby boomers begin to retire and that current fiscal policy remains unsustainable,” Bixby said.
CBO concludes in today's report: “A substantial reduction in the growth of spending and perhaps a sizable increase in taxes as a share of the economy will be necessary for fiscal stability to be at all likely in the coming decades.”
“The real question is whether the President and Congress are up to this challenge or will they be content to let these developing problems fester in hopes that future lawmakers -- with fewer choices and perhaps acting under crisis circumstances -- can find solutions,” said Bixby.
To view the Concord Coalition's plausible baseline projection visit: http://www.concordcoalition.org/issues/fedbudget/charts/0601-plausible-baseline.pdf