CBO expects this good news to continue: “Because revenues, under current law, are projected to rise more rapidly than spending in the next two years, deficits in CBO’s baseline projections continue to shrink,” down to 2.1 percent of GDP, compared to 4.0 percent this year. Apparently the Bush tax cuts did not destroy federal finances and impoverish the public sector, as has so often been claimed.
Alas, the good news stops at these numbers.
Last year’s deficit was $1.1 trillion. This year it is likely to be $642 billion. CBO estimates that the red ink will fall to $378 billion in 2015, which is small only compared to recent deficits. Then the deficits start moving inexorably upwards. In 2016 the deficit will run $432 billion, roughly the 2008 level. In 2023 the agency figures Uncle Sam will run $895 billion in red ink, heading back toward the trillion-dollar mark.
For the coming decade that means $6.3 trillion more in deficits. That amount will be directly added to the national debt. CBO discounts the total national debt by ignoring inter-governmental borrowing — that is, revenues taken from Social Security “surpluses.” Of course, the money ultimately must be raised in the future to pay promised benefits. Moreover, since Social Security’s finances have gone negative, $169 billion last year alone, the difference between debt totals will shrink over time.
Anyway, CBO predicts the national debt will nearly double over the next decade, going from $11.3 trillion to $19.1 trillion. Explained the agency: “With such deficits, federal debt held by the public is projected to remain above 70 percent of GDP — far higher than the 39 percent average seen over the past four decades.” Amazingly, it was “only” 36 percent of GDP in 2008, which seems like an eternity ago. But the current projection is 74 percent in 2023, twice the 2008 levels, and the debt/GDP ratio will “continue to be on an upward path” afterwards.
Of course, increasing interest payments would further fuel spending. Explained CBO, “Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially.”
Unfortunately, continuing to pile up debt is not just financially expensive. It also threatens to slow economic growth, which in turn would make it harder for the public to pay the government’s increased interest payments. Said the agency: “because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced.”
This should surprise no one. Detailed work by economists Carmen Reinhard, Vincent Reinhard, and Kenneth Rogoff found substantial differences in growth rates depending on levels of public debt. Last year a study from the Bank for International Settlements found a notably negative impact on economic growth when the debt/GDP ratio climbed above 84 percent. A ten percent rise in that ratio led to a .18 percent drop in economic growth.
Three years ago a study by the International Monetary Fund reached similar results. It concluded that the negative impact of borrowing increased as the debt/GDP ratio climbed from 30 percent to 90 percent. Economies with ratios above that level grew more slowly than economies below that threshold, 2.3 percent compared to 3.5 percent. Between 30 and 60 percent, a ten percent hike in debt/GDP ratios reduced growth by about .16 percent.
These may not sound like a lot, but the reductions add up. According to the Heritage Foundation’s Salim Furth, the IMF analysis indicated that “Debt added from 2009 to 2011 has already cost Americans $200 billion in foregone growth” and “Higher debt will cost Americans $2.4 trillion over the next five years.” Yet at the end of the latter period Americans would have to find sufficient resources to pay the increased interest payments and pay off the increased debt.
CBO also worried that “lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges.” Of course, if a bigger debt discouraged wasteful spending (the usual outcome when lawmakers “use tax and spending policy to respond to unexpected challenges”) that would be good. However, experience suggests that Congress is all too willing to borrow wildly, toss good money after bad, and then borrow wildly again. High indebtedness just doesn’t seem to slow spending.
Finally, there’s the prospect of a fiscal crisis. Warned CBO: “a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.” Of course, investors should long ago have lost any such confidence. Uncle Sam has not intelligently managed his finances in years.
STILL, A FINANCIAL CRISIS really is to no one’s advantage. In theory disaster should provide an opportunity for change. However, countries like Greece have piled social crisis upon economic crisis yet avoided making serious reforms. All too often fiscal crises have generated enormous social hardship and ultimately encouraged statist, even authoritarian political outcomes.
Even more important, however, the next decade is not the critical period. In the long run we are all dead, observed famed economist John Maynard Keynes. However, in this case the long run really isn’t that far away. Indeed, CBO pointed to long-run problems evident in the short run.
First, explained the agency, spending on Social Security and Medicare “begins to rise relative to GDP in the final few years of the period.” Moreover, Obamacare will be the gift that keeps on giving. Reported the agency: “Spending on subsidies that will help people purchase health insurance through exchanges (which will become available starting in 2014 for individuals and families who meet income and other eligibility criteria), along with related spending, is projected to increase from 0.1 percent of GDP in 2014 to 0.5 percent 10 years from now.”
Of course, the future is not fixed. Some uncertain costs, such as for America’s endless military interventions abroad, could be lower than predicted. However, with the Obama administration slowly sliding into war in Syria, these outlays likely will be greater.
Congress might suddenly suffer from a bout of fiscal responsibility and slash spending. That’s possible. Though more likely is an invasion from Mars, which would relieve Americans of their budget problems entirely.
Unfortunately, legislators are more likely to be more irresponsible. Indeed, CBO offered an “alternative fiscal scenario” which assumed that Congress halts scheduled cuts in Medicare payments (as it has done every year over the last decade), repeals the sequester (which will be decided during the bitter battle between House and Senate, which are controlled by different parties), and extends tax provisions scheduled to expire (precisely the sort of special interest tax preferences that legislators most love to offer). In this case, “Relative to the baseline projections for 2014 to 2023, deficits would rise by a total of $2.4 trillion (including debt service costs) to yield cumulative deficits of $8.8 trillion. Debt held by the public would reach 83 percent of GDP by the end of 2023, the largest share since 1948.”
Other than that, everything is fine with the federal budget!
However, what is really scary is the U.S. government’s post-2023 financial future. As the Baby Boom generation retires, expenditures on Social Security and Medicare will explode. Moreover, having expanded third party health care payments by expanding insurance coverage to more people for more procedures, Obamacare will fuel medical costs. That, in turn, will hike federal medical expenditures and insurance subsidies
Indeed, in its report four months ago CBO explained: “Under current law, the aging of the population, the rising costs of health care, and the scheduled expansion in federal subsidies for health insurance will substantially boost federal spending on Social Security and the government’s major health care programs, relative to GDP, for the next 10 years and for decades thereafter.” Without substantial policy changes “debt will rise sharply relative to GDP after 2023.”
Over the last four decades federal spending has run 20.2 percent of GDP. Absent significant policy changes, that ratio could hit 36 percent within a quarter century. Over time Social Security and Medicare alone could consume almost as much of the U.S. economy as the entire government did over the last four decades.
These outlay increases will have all of the effects that the agency cited for much smaller expenditures during the coming decade. Federal debts will race upward. Rising interest payments will absorb ever more federal resources. Rising interest rates and federal borrowing will channel economic resources away from productive private investment. Economic growth will slow. The possibility of a financial crisis will increase.
And these problems will build for years, even decades, into the future.
This year’s deficit has fallen from outer space to the upper atmosphere. That’s good, but only a very modest first step. Moreover, without real budget reform, future deficits will rocket back upward. In short, the budget crisis is not over. In fact, it has only just begun.
