Fiscal Picture Likely Worse

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The federal budget is currently on an unsustainable path, and that path has been made worse by recent congressional action. Yet a new Congressional Budget Office (CBO) analysis shows that its standard projections, which assume current laws remain in place, likely understate the projected path of debt.

If Congress continues certain recent policies, the path gets much worse, bringing key economic outcomes down with it.

Under current law, the CBO pojectects that debt held by the public will rise from 78 percent of GDP in 2018 to 118 percent in 2038, and 152 percent of GDP in 2048. The highest level of debt the country has previously seen was 106 percent of GDP right after World War II.

The assumptions in the CBO’s “current policy alternative”:

  • Congress extends tax breaks that are scheduled to expire, including the individual income tax cuts from the 2017 tax bill, something which Republicans in Congress are currently planning to vote on. CBO then assumes federal revenues would stay roughly at the same level relative to the economy going forward (which is consistent with the 40-year average for revenues).

  • Congress continues postponing the Obamacare “cadillac tax” on high-cost insurance.

  • Congress continues increasing discretionary appropriations above enacted cap and sequester levels, to roughly keep pace with inflation.

Under this alternative scenario, federal debt held by the public would be substantially higher than current-law projections. That debt would increase from 78 percent of GDP in 2018 to 151 percent of GDP in 2038, and 230 percent in 2048.

This alternative path has revenues 1.7 percent of GDP lower than current law by 2038 and spending 0.9 percent higher by 2038. The deficit would grow from 3.9 percent of GDP in 2018 to 11.3 percent of GDP in 2038, as opposed to a current-law deficit of 7.1 percent of GDP in 2038.

The economy worsens under this alternative with reduced national savings and national income, and with higher interest rates. CBO suggests any short-term economic boost from continuing current tax and spending policies would be outweighed by the negative effects from increasing debt.

For decades the U.S. has been on a fiscal path with debt projected to grow faster than the economy. The CBO’s new report indicates we are more likely in a scenario where matters are going to be made worse rather than better, with even greater negative consequences for the economy.

Congress must not only stop digging the fiscal hole deeper, it must proactively make major changes to revenues and spending to put the country on a more sustainable path.

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