Tuesday, June 30, 2009

On Debt or the Long-Term Budget Outlook

The Congressional Budget Office (CBO) requires the director to keep a blog. Douglas Elmendorf has the job of being "the skunk at the garden party." I'm just going to paste this post from last Thursday about the long-term picture.
As I've written here before, the current deficits created by the stimulus are not the problem. The fall in tax revenues due to the recession and the exponentially projected debt as a percentage of GDP due to the "demographic timebomb" of Baby Boomers retiring and health care costs rising rapidly.

Elmendorf (with bolding by me):

Today CBO released the Long-Term Budget Outlook. Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario. Unless tax revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States.

Keeping deficits and debt from reaching levels that could cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two. Making such changes sooner rather than later would lessen the risks that current fiscal policy poses to the economy. Although the policy choices that will be necessary are difficult, CBO’s long-term budget projections make clear that doing nothing is not an option: Legislation must ultimately be adopted that raises revenue or reduces spending or both. Moreover, delaying action simply exacerbates the challenge, as is discussed in the report.

For decades, spending on the federal government’s major health care programs, Medicare and Medicaid, has been growing faster than the economy (as has health care spending in the private sector). CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from almost 5 percent of GDP today to almost 10 percent by calendar year 2035 and to more than 17 percent of GDP by 2080. That projection means that in 2080, if there are no changes in policy, the federal government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years. Constraining the costs of those health care programs will be a key to developing a sustainable fiscal policy. Social Security has a smaller effect on the budget outlook: CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that rate through 2080.

The current recession contributes to the long-term fiscal imbalance by raising the debt burden of the federal government and shortening the period during which policymakers can enact measures that would correct the imbalances. CBO estimates that in the next two years, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. The higher debt results in permanently higher spending to pay interest on that debt (unless the debt is later paid off).

Me again:
So, the question you should be asking your congressman is: What are you doing about health care costs? If you oppose the Obama plan and don't think it will lead to a lesser rate of growth in the cost of health care, what do you propose in its place to keep costs down? Doing nothing appears to be NOT an option.

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