The $2.1 trillion in spending cuts passed by Congress in 2011 won’t curb the growth of entitlements that poses a fiscal-crisis risk in the next 25 years, the Congressional Budget Office said in an annual report on long-term budget projections.
The almost 60 percent reduction in annual budget deficits since 2009 won’t avert the ballooning of publicly held debt as an aging population strains the resources of Medicare and Social Security, according to the report, released yesterday. Failure to curb the long-term growth of debt raises the risk of a financial crisis when investors demand “very high interest rates” on government bonds, the nonpartisan agency said.
Congress would need to pass $4 trillion in spending cuts or tax increases over the next decade to reduce government indebtedness from its current level of 73 percent of gross domestic product to less than its 40-year average of 38 percent, the CBO said. That’s on top of the $2.1 trillion that Congress mandated in the 2011 deal that raised the government’s borrowing authority.
“Unless substantial changes are made to the major health-care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in future than they have in the past,” the CBO said in the report.
Under current law, federal spending will rise from 22 percent of GDP in 2012 to 26 percent in 2038, the CBO said. The deficit would be 6.5 percent of GDP in 2038, greater than any year between 1947 and 2008, it said in the report.
CBO analysts used an alternate economic scenario that assumes current policies remain in place to project that publicly held debt would make up 190 percent of GDP by 2038. That scenario also assumes that Congress will end the $1.2 trillion in automatic spending reductions known as sequestration that began this year. President Barack Obama and Democrats are pressing for an end to those cuts, which are also unpopular with some Republicans.
To lower deficits, the president has called for different spending cuts plus limits on tax deductions for those with the highest incomes. Republicans in Congress have said that they won’t agree to any more tax increases, citing the January rise in the rate to 39.6 percent on earnings of more than $400,000 for individuals and more than $450,000 for married couples.
The CBO said that “a large and continually growing federal debt” would “increase the probability of a fiscal crisis” as investors “become unwilling to finance” continued borrowing “unless they are compensated with very high interest rates.” Congress would then be left with “only limited -- and unattractive options for responding to it,” the agency said.
CBO Director Douglas Elmendorf told reporters yesterday that “the federal budget is on a course that cannot be sustained indefinitely” and that lawmakers haven’t made the “fundamental changes” to entitlement programs and taxation that are needed to end the imbalance of spending and revenue.
“We as a society have a fundamental choice of whether to cut back on those programs or to raise taxes to pay for them,” he said. “So far, we’ve chosen to do very little of either.”
Republicans and Democrats seized on different parts of the report as political ammunition for the debate in Congress about the terms of financing the government’s continued operation after the Oct. 1 start of the 2014 federal fiscal year.
“CBO has posed an important question: Are we going to get control of the debt before it reaches a breaking point?” House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, said in a statement. “The president and congressional Democrats want to wish the problem away. But that’s simply irresponsible.”
House Minority Whip Steny Hoyer, a Maryland Democrat, said in a statement that the enactment in early January of a measure to extend most of the 2001 and 2003 tax cuts, except for those applying to the highest earners, “will cause our debt to grow as a share of the economy.” The report shows that “revenue must have a place in any successful solution to bring our deficits down in the long term,” Hoyer said.
Even though tax receipts would grow from 15 percent of the economy last year to 19.5 percent by 2038, the revenue increase wouldn’t be “large enough to keep federal debt” from “growing faster than the economy starting in the next several years,” according to the CBO report.
Ryan said the analysis shows that “government spending, especially on health care, is driving our debt.” The 2010 health-care law, he added, “was a costly mistake.”
Still, CBO lowered its 2012 projection for how much the government would spend on major health-care programs in 2038 by 0.7 percent in this year’s forecast.
That spending includes Medicare, Medicaid, children’s health-care programs and subsidies for people buying coverage on state insurance exchanges being set up under the 2010 law.
By 2038, the expansion of Medicare, the insurance program for older Americans, and the subsidies for coverage through the exchanges would account for 26 percent of the growth in health-care spending, the CBO said.
Population aging would account for 35 percent of that growth. The rise in health-care spending that exceeds economic expansion would amount to 40 percent of the total increase.
“The insurance-coverage provisions of the Affordable Care Act explain about one-quarter of the increase in federal health spending relative to GDP over the next 25 years,” Elmendorf said. Even with a significant expansion of support for lower-income Americans, “the great majority of growth in federal health-care spending is not related” to the law, he said.
The CBO report comes as a politically divided Congress faces the risk of a government shutdown on differences over legislation to finance operations in fiscal 2014.
Many House Republicans want to condition any new spending with a provision to defund or delay the implementation of the health-care law. Also in coming weeks, the government’s borrowing authority is set to expire as it reaches a limit on debt, which may become the focus of the same policy fight.
Elmendorf told reporters that if Congress failed to raise the debt ceiling, “Treasury would be unable to meet its obligation sometime between the end of October and mid-November.”
Writing on Aug. 26 to House Speaker John Boehner, an Ohio Republican, Treasury Secretary Jacob J. Lew said that the government will reach that debt limit by mid-October.
In a speech yesterday to the Economic Club of Washington, Lew said lawmakers shouldn’t risk default on government debt by waging policy fights over extending the government’s borrowing authority.
“The time to make policy is before, not after, we have made commitments,” he said in his prepared text. “Elected leaders have a responsibility to make our economy stronger, not to create manufactured crises that inflict damage.”
CBO left virtually unchanged its May projection that the government would end fiscal 2013 with a deficit of $642 billion.
The agency forecast that the annual deficit would decline to 2 percent of economic output in 2015. By 2018, the total publicly held debt would drop to 68 percent of GDP from the current level of more than 70 percent before rising again.
Elmendorf said that since CBO’s May projection of the 2013 deficit, tax collections have been “a little less” while spending will be “a little larger.” That means the deficit will be closer to $700 billion, or about 4 percent of GDP.