CBO Report Points to Runaway Spending Increasing the Risk of a Fiscal Crisis

The latest budget and economic outlook from the non-partisan Congressional Budget Office (CBO), released on Tuesday, projects the federal budget deficit will rise from 4.6 percent of GDP in 2020 to 5.4 percent in 2030. These large deficits in turn will push the federal debt held by the public from 81 percent of GDP this year to 98 percent in 2030, and to 180 percent of GDP in 2050.

  • The CBO warns that a high and rising federal debt would reduce national saving and income, boost the government’s interest payments, limit the ability of policymakers to respond to unforeseen events, and increase the likelihood of a fiscal crisis.

Congress’s failure to rein in spending is the main culprit in the increase in the size of the deficit in the next 10 years. Specifically, the CBO projections point to the ever increasing costs of mandatory spending programs, particularly for Social Security and federal health care programs.

  • The CBO projects that by 2030 total outlays for Social Security and federal health care programs will rise to 13.0 percent of GDP from 10.3 percent this year, or 2.7 percentage points higher than this year and 5.4 percentage points higher than in 1995.
  • In the CBO outlook, defense and non-defense discretionary spending will fall to 5.6 percent of GDP in 2030 from 6.4 percent this year. Any new federal programs not already established in law would make the deficit even worse.

Whoever wins the presidential election this year will face the daunting task of addressing this mismatch of revenues and spending. President Trump’s preferred path, so far, of attempting to close the deficit by spurring economic growth will not work if the growth of mandatory spending continues to outpace economic growth.

  • Even the most optimistic growth projections produced by the Trump administration fall short of the 5 percent annual growth in mandatory spending estimated by the CBO during the next 10 years.
  • President Trump has promised new health care reforms to curb the growth in federal health care spending but he has not released any details.

The proposals of the various Democratic presidential candidates to vastly increase taxes to close the fiscal gap are even worse. The CBO outlook estimates that federal revenues will return to 18 percent of GDP by 2027 from 16.4 percent this year. As I mentioned last week, the historical data strongly suggests that there is a practical federal revenue ceiling of about 18 percent of GDP.

  • Any attempts to increase the taxes above this level would almost certainly fail as tax payers and corporations move to shelter more of their incomes or pull back from economic activities whose reduced after-tax profits are need seen to be worth the risk.
  • The economic consequences would be an economic slowdown, or even a recession, that would simultaneously reduce revenues below planned levels and increase demands for more social spending, thus widening rather than reducing the deficit.

The only long-term solution is to cut the growth in mandatory spending. The only question is whether the leadership in Washington will have the courage to take this action early enough to do it in an orderly manner or if they will wait until a fiscal crisis imposes a solution upon them. History will not look kindly on them if they choose the later path.

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