Budget Deal: Debt and Denial Grow Deeper

Blog Post
Thursday, August 01, 2019

The House and Senate have now passed a bipartisan budget deal. If signed by the president, as expected, the deal would lessen the chances of another government shutdown when the fiscal year ends on September 30th and suspend the debt limit for two years, postponing for now the dangerous prospect of default.

That’s the good news. 

The bad news is that the agreement was purchased at the cost of increasing the deficit and raising the debt. Less than a quarter of the proposed new spending would be offset and spending caps will be eliminated going forward. This type of “bipartisan cooperation” is all too familiar and ignores a recent warning from the Congressional Budget Office (CBO) that the federal budget is already on an unsustainable path. 

Few in Washington, including the president and those seeking the presidency in 2020, took notice last month when CBO issued its annual update of the long-term budget outlook. They should have. The growing national debt and its projected path pose a threat to the economic future of our nation. 

Perhaps the most alarming aspect of the long-term outlook is how much of it is caused by structural factors, not the ups and downs of the business cycle or the breakdown of the annual budget process. 

To illustrate the magnitude of the problem, CBO estimated that simply stabilizing the debt through 2049 at its current level, already high by historical standards, would require some combination of spending cuts and tax increases totaling 1.8 percent of the gross domestic product (GDP) each year. In 2020 that would amount to about $400 billion. 

Nothing like that is on the table. In fact, the new budget deal and a recent House vote to kill the so-called “Cadillac Tax,” which was supposed to help pay for expanded health care coverage under the Affordable Care Act, indicate a willingness to dig the hole even deeper.

The driving systemic forces of the problem are demographics and rising health care costs.

As the last of the post-World War II baby boomers turn 55 years old this year, we are faced with the reality of an aging population and the increased spending that results for programs such as Social Security, Medicare and Medicaid. 

Today, 16 percent of the population is age 65 or older. Within 30 years it will be 22 percent. Aging alone will drive up the cost of Social Security and the major health care programs by a combined 3 percent of GDP by 2049. If 3 percent of GDP sounds small, consider that it is the equivalent of doubling current spending on national defense.

Demographics, however, is only part of the problem. The rising per-beneficiary costs of providing health care will add spending amounting to another 3.1 percent of GDP for the major health care programs. 

In total, spending on Social Security and the major health care programs will jump from 10.7 percent of GDP in 2019 to 16.8 percent in 2049, increasing their share of federal spending (other than interest on the national debt) from 53 percent to nearly 70 percent.

Revenues are projected to grow as well but not nearly enough to keep up with spending. The resulting mismatch will drive up the debt and the cost of servicing the debt. According to CBO’s long-term outlook, interest payments will climb from $382 billion this year to $921 billion in 2029 and more than $3 trillion by 2049.

Demographic factors will also hinder the economic growth needed to support the added fiscal burdens by slowing labor force growth. Over the past 30 years, the labor force grew by an annual average rate of 1 percent. However, over the next 30 years CBO projects that it will grow by just 0.4 percent annually.

Labor force productivity, another key component behind economic growth, is also projected to fall behind what it has been in the past, let alone keep up with what will be needed for a higher ratio of retirees per worker. Discretionary spending on federal government investment, which could be used to boost human capital and infrastructure leading to increased productivity, is being squeezed out by rising benefit payments due to aging.

Because of a slower-growing labor force and stagnant productivity, CBO estimates that the economy will grow by just 1.9 percent annually from 2019 through 2049. That would be a substantial drop from the 2.5 average annual growth rate over the past 30 years. 

The combination of rising deficits and slower economic growth will ratchet-up the debt-to-GDP ratio to a record 144 percent by 2049, according to CBO. Already this scenario has proved to be optimistic because it didn't include the elimination of spending caps from the budget deal. Under an alternative scenario that includes the elimination of caps plus the extension of expiring tax cuts, CBO says the debt-to-GDP ratio could hit 219 percent by 2049.

Putting the budget on a sustainable path will require more than quick-fix solutions such as cutting “waste, fraud and abuse” or “taxing the rich.” It will require attention to broader systemic issues such as delivering health care services at a lower cost, expanding the labor force and improving productivity. None of this will be easy but it beats sticking our heads in the sand and blithely adding new spending and new tax cuts as if we had nothing to worry about. The debt is a problem. It is not going away on its own. Policymakers and the public should face up to this responsibility. 

A good way to start would be to take the CBO report off the shelf and give it a thorough read. The best way to avoid its dire projections is to do something about them now.