Long-term Outlook on Federal Spending, Debt and Taxes

December 19, 2005

A new Congressional Budget Office study (PDF) released last week takes a hard look at projected trends in federal spending, debt and taxes over the next half-century. The picture is less than rosy. From the executive summary:

Driven by rising health care costs and an aging population, federal spending for Medicare, Medicaid, and Social Security will claim a sharply increasing share of the nation’s economic output over the coming decades.

Even if taxation reached levels that were unprecedented in the United States, current spending policies could become financially unsustainable. An evergrowing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy.

As the U.S. tax system is now configured, federal revenues will grow faster than the overall economy. Under current law, taxpayers will face higher rates, with detrimental consequences for work, saving, and economic growth.

If taxation is restricted to the levels that prevailed in the past, the growth of spending on programs for the elderly will have to be reduced substantially. Limiting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability.

Likewise, economic growth alone is unlikely to bring the nation’s long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce economic growth.

Here’s one of many interesting charts in the study (click to enlarge):

Here’s another I like to call “choose your own adventure” (click to enlarge):

And the budgetary elephant in the room, looming increases in Social Security spending (click to enlarge):

Read the full study here.

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