Earlier today, the non-partisan Congressional Budget Office (CBO) released its 2014 Long-Term Budget Outlook, an annual report that projects government spending, tax revenue, deficits, and debt over the next 25 years. Like last year’s report, today’s report paints a sobering picture of our nation’s long-term fiscal health and reinforces the need for bipartisan action to reduce our long-term debt.
Outlook for the next decade
Federal debt held by the public currently stands at 74 percent of gross domestic product (GDP) – one percentage point higher than last year and at its highest level in U.S. history since 1950. CBO expects the deficit to remain relatively small (2.5 to 3 percent of GDP) through 2018 and debt to remain at or below current levels through 2020.
Debt stability over the next few years will be driven by increased tax receipts and slowing spending resulting from the economic recovery, as well as spending controls imposed by the Budget Control Act. Relatively constant or even shrinking debt over the next several years should not be taken as a sign that the long-term budget picture is improving. The budget outlook deteriorates significantly beyond the ten-year window.
Long-term outlook: an unsustainable path
CBO expects spending on mandatory healthcare programs, Social Security, and interest payments on the debt to increase steadily over the next 25 years under current law. Massive increases in entitlement and interest spending will be offset only somewhat by increased federal tax revenue. Under a current law estimate, and excluding the economic effects on increased debt, the federal deficit is projected to balloon to 6.5 percent of GDP by 2039 and debt held by the public to 106 percent of GDP.
Escalating federal debt and deficits will be driven primarily by the aging of the population and the retirement of the Baby Boomers and an inefficient tax code. CBO also expects interest payments on the federal debt to increase substantially over the next 25 years, largely due to the increased debt load and to interest rates that return to historical averages from their current lows. And while federal tax revenue is also expected to increase to 19.5 percent of GDP in 2039 from about 17.5 percent in 2014, that will not match total federal spending, which is projected to reach 26 percent in 2039 from 20 percent in 2014.
CBO’s current-law estimates likely understate the magnitude of future deficits and debt because the estimate does not incorporate the possible negative effects of very high levels of federal deficits and debt and ignores some likely policy changes. High debt burdens could crowd out private investment or even cause interest rates to spike. Moreover, increased entitlement spending could preclude federal investments in infrastructure and education, weakening economic growth. CBO also notes that high deficit and debt levels could hamper the government’s ability to use fiscal policy to mitigate future recessions, further harming growth.
In its outlook, CBO also publishes an Extended Alternative Fiscal Scenario that aims to reflect current policy rather than current law. The scenario incorporates the economic effects of increased debt, assumes that automatic spending cuts required by the Budget Control Act and subsequent related legislation do not occur (though it assumes the discretionary spending caps in those laws remain in effect) and that that Congress continues to enact the “Doc Fix” so Medicare’s physician repayment rates do not drop. Under these, more realistic, assumptions, our nation’s fiscal outlook is even more bleak. Federal debt held by the public is expected to increase to a staggering 180 percent of GDP by 2039 (compared to 106 percent under the current-law baseline).
Serious, bipartisan action is needed
CBO’s report only confirms what we already knew: our nation’s long-term fiscal path is unsustainable. If our political leaders don’t take action, demographic shifts will cause spending on entitlement programs to grow out of control. Debt will begin to grow faster than our economy and tax revenue, putting us on an unsustainable path.
In 2010, BPC’s Domenici-Rivlin Debt Reduction Task Force proposed a bipartisan framework of common-sense solutions to rein in entitlement spending, reform our complex and broken tax code, and put our nation on a sustainable fiscal path. We continue to urge policymakers to come together to address our serious fiscal challenges. We hope policymakers will respond to today’s report with a renewed sense of urgency and bipartisan collaboration to restore our nation’s fiscal health.
Alex Gold served as a policy analyst for BPC’s Economic Policy Project.
Alex Cave contributed to this post.