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CBO Cuts through the Noise: Spending Growth is Unsustainable

3 min readBy: William McBride

The federal budget is complex, and the partisan chatter surrounding it tends to muddy the water further. That’s why it’s important to get it straight from the horse’s mouth. The Congressional Budget Office (CBO), our nation’s primary arbiter of budget issues, just released their long term budget forecast. Behold:

Under current law, an aging population and rapidly rising health care costs will sharply increase federal spending for health care programs and Social Security. If revenues remained at their historical average share of gross domestic product (GDP), such spending growth would cause federal debt to grow to unsustainable levels. If policymakers are to put the federal government on a sustainable budgetary path, they will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.

Recently, the federal government has been recording budget deficits that are the largest as a share of the economy since 1945. Consequently, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of this year, the Congressional Budget Office (CBO) projects, federal debt will reach roughly 70 percent of gross domestic product (GDP)-the highest percentage since shortly after World War II.

According to CBO’s projections, if current laws remained in place, spending on the major mandatory health care programs alone would grow from less than 6 percent of GDP today to about 9 percent in 2035 and would continue to increase thereafter. Spending on Social Security is projected to rise much less sharply, from less than 5 percent of GDP today to about 6 percent in 2030, and then to stabilize at roughly that level. Altogether, the aging of the population and the rising cost of health care would cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 15 percent of GDP 25 years from now. (By comparison, spending on all of the federal government’s programs and activities, excluding interest payments on debt, has averaged about 18.5 percent of GDP over the past 40 years.)

The CBO does not mince words. Health care spending is at the core of our budget deficits, and any serious discussion should address that. For more on why health care spending is quite literally out of control, consider Uwe Reinhardt’s excellent primer on Medicare spending and the so called ‘doc fix’. Nonetheless, some partisans choose to focus on the Bush taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts as the cause of projected deficits. In response, we again use CBO data to show that the main culprit is spending increases, followed by economic fluctuations. The Bush tax cuts come in a distant third.

Addendum: The Daily Beast has this news:

House Majority Leader Eric Cantor has dropped out of bipartisan talks convened by Vice President Joe Biden to reach a deal on deficit reduction, and Republican Sen. Jon Kyl is said to be pulling out as well. Cantor said his decision to leave was the result of a disagreement over whether to raise taxes. Democrats, as well as leading economists, say it’s impossible to close the deficit without increased revenues, but Republicans have categorically ruled out any tax hikes.

This economist says it is certainly possible to close the deficit by cutting spending. It’s just politically unlikely.