WASHINGTON -- Although the federal deficit is currently dropping, The Concord Coalition said today that new projections by the Congressional Budget Office (CBO) show that Washington cannot afford to put fiscal reform on the back burner.
The CBO’s Budget and Economic Outlook, released this morning, estimates that budget deficits will add $7.9 trillion to the federal debt in the coming decade as Washington struggles with high health care spending, rising interest costs, a dysfunctional tax system and an aging population.
“The recession pushed the deficit up and, as expected, the recovery is now pushing it down,” said Concord Coalition Executive Director Robert L. Bixby. “In addition, Congress in the last two years has cut some spending and raised some taxes. But the CBO’s new report is an important reminder that our elected officials must still address the country’s unsustainable fiscal policies and long-term economic challenges.”
The strengthening recovery has eased some immediate pressure on the budget, bringing in more revenue and automatically reducing some spending. But the CBO estimates that deficits will start to rise again after next year.
The budget office projects 10-year deficits totaling $7.9 trillion that assume unrealistic fiscal restraint in Congress. Under more plausible assumptions -- including the extension of current tax policy and doctor payments in Medicare, and discretionary spending growth at the rate of inflation -- deficits would total $9.4 trillion over the next 10 years. And even that projection assumes lawmakers stick with sequestration in mandatory spending programs, which for now they have shown an inclination to do.
CBO says federal debt held by the public will equal 74 percent of GDP at the end of this year and climb to 79 percent over the next decade -- levels that it notes are “very high by historical standards.” As recently as 2007 the figure was only 35 percent of GDP. As the budget office points out, our large and growing debt “could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.”
Making matters even worse, interest rates are projected to rise from what CBO describes as “exceptionally low” levels since the recession. It projects that interest costs will grow to 3.3 percent of GDP in 2024, up from 1.3 percent this year.
“We’re still enjoying ‘teaser rates’ as far as interest on the debt is concerned,” Bixby said. “We should not wait until those rates shoot up to start figuring out how to quit putting so much on Washington’s credit card.”
Rising spending on interest, major health care programs and Social Security account for all of the projected growth in federal spending as a share of GDP. Those items will rise by 4 percent of GDP over the next 10 years under current law. All other spending is projected to shrink as a share of the economy.
The CBO report, like the annual reports from the Medicare and Social Security trustees, shows that these important programs are not on sustainable paths.With millions of baby boomers expected to start collecting full or early retirement benefits, the number of Social Security beneficiaries will balloon by almost 40 percent in just 10 years.
The new report takes into account the recent slowdown in health care costs. CBO projects the cost per Medicare beneficiary will rise at 1.5 percent a year over the next decade, compared to an average of 4 percent between 1987 and 2007.
Yet Medicare spending is still expected to rise by more than 80 percent, and overall annual health expenditures are set to double to $1.8 trillion within 10 years. This is primarily caused by the retirement of the baby boomers and the expansion of coverage in the Affordable Care Act.
“For many years, health care costs rose faster than economic growth,” Bixby said. “So the break in that pattern has been welcome news. But there is considerable uncertainty about whether that break will continue, and even if it does the aging of the population will drive health care program spending to grow more quickly than the economy can keep up.”
The CBO report also shows the high cost of tax expenditures, which essentially subsidize certain individuals, activities and businesses through the tax code. More than 200 tax expenditures are projected to lower federal revenue in the current fiscal year by $1.4 trillion, which equals more than half of all federal revenues. The Concord Coalition has long urged comprehensive tax reform to simplify the code and reduce deficits.
“Many elected officials seem to think it is time to take a break from the subject of major fiscal reform, and are likely to cherry-pick the most encouraging short-term numbers in the CBO report to justify their thinking,” Bixby says. “But the bigger difficulties are still there, and responsible political leaders should commit to doing something about them. And the strengthening economy noted in the report could soon provide them with an ideal opportunity to pursue long-term fiscal reforms."
Media Contact: Steve Winn, [email protected], 703-254-7828
The Concord Coalition is a nonpartisan, grassroots organization dedicated to fiscal responsibility. Since 1992, Concord has worked to educate the public about the causes and consequences of the federal deficit and debt, and to develop realistic solutions for sustainable budgets. For more fiscal news and analysis, visit concordcoalition.org and follow us on Twitter: @ConcordC