While President Obama keeps calling for more taxes, today’s figures from the Congressional Budget Office (CBO) show the tax hike he signed into law just last month will provide no lasting improvement in the federal government’s fiscal outlook. This is because spending continues to grow, driving deficits back toward the $1 trillion range by late in the decade. If the President is actually serious about solving the nation’s fiscal problems, he must move to the other side of his “balanced approach”: cutting spending.
The figures in the CBO’s The Budget and Economic Outlook: Fiscal Years 2013 to 2023, show the following:
- Spending this year will reach $3.6 trillion and climb to nearly $6 trillion by 2023, or 22.2 percent of gross domestic product (GDP). Government spending will continue to swallow up more than one-fifth the economy’s total output through the 10-year budget projection, reaching 22.9 percent of GDP by 2023, far in excess of its historical level of 20.2 percent. Even with taxes running above their historical average, spending persistently outruns tax revenue, resulting in chronic deficits that grow persistently after 2016. This report confirms, as have its predecessors, that the federal government’s fiscal woes are driven by its massive spending problem.
- With economic growth and President Obama’s two tax increases, the $1 trillion tax hike in Obamacare, and the $618 billion fiscal cliff increase, revenues will surge to 19.1 percent of gross domestic product (GDP) in 2015, and will remain well above the historical average of 18.5 percent for the rest of the decade. These figures offer conclusive proof that—notwithstanding the assertions of the President and Senate Democrats—there is plenty of revenue flowing into Washington.
- Yet even all this new revenue fails to solve the government’s fiscal problems. Starting at $845 billion this year, deficits shrink somewhat through 2016, but then start rising again, returning to near the trillion-dollar range by 2023. The pattern proves that higher taxes cannot solve the deficit problem—only spending restraint can.
- Debt held by the public this year will be $12.2 trillion, or 76.3 percent of GDP. This debt will remain at around three-fourths the size of the economy or above throughout the decade. These are the highest levels of publicly held debt in 60 years, but unlike those of World War II, these are structural deficits that will persist and worsen over the longer term. Moreover, the projection is based on optimistic assumptions. If different policy outcomes occur (see below), debt held by the public could reach 87 percent of GDP by 2023. With debt at this level, economic growth would slow dramatically.
- Entitlements, which the President refuses to address, continue to drive the spending problem. These programs—led by Medicare, Medicaid, and Social Security—will cause entitlement spending to rise from 13.2 percent of GDP this year to 14.1 percent by 2023, and reach nearly 62 percent of the entire federal budget. Those who claim to be defending these programs by stubbornly resisting needed reforms are only ensuring they will collapse under their own costs. Obamacare makes matters worse, adding nearly $1 trillion in new spending over the next 10 years just for its insurance subsidies. The health care overhaul also will increase spending for Medicaid and the Children’s Health Insurance Program by hundreds of billions of dollars. In dollar terms, spending on Social Security and the health entitlements will more than double in the next 10 years, from $885 billion this year to $1.85 trillion in 2023.
Grim as all this appears, a closer look at these “baseline” figures shows how easily the picture could worsen. For instance, due to estimating conventions written in law, the CBO assumes a sharp plunge in reimbursement rates for Medicare physicians starting next year. Since 2003, however, Congress has routinely waived these reductions. If they do so again, it could add as much as $138 billion in Medicare spending over the next 10 years.
The CBO also assumes the automatic spending cuts known as “sequestration” will kick in on March 1 as scheduled. If Congress does not have the will to maintain this level of cuts—the President just today called for more tax increases to offset some of them—spending could be nearly $1 trillion higher than the CBO estimates over 10 years. This would also drive debt levels much higher than otherwise projected.
On the other hand, the CBO’s figures present an opportunity for the President or Congress to claim phantom spending reductions. This is because the baseline projects spending for activities in Iraq and Afghanistan will grow with inflation each year, when in fact it is scheduled to decline sharply as the U.S. brings troops back home. In past budgets, the President has claimed bogus new savings by not spending these additional funds—which were not going to be spent anyway. Use of these phantom savings, whether by the Congress or the President, will reveal a lack of seriousness about solving the government’s spending and debt problems.
In any case, the message to be drawn from the CBO’s report is the same as it’s been for years: To have any chance of getting federal deficits and debt under control—and moving toward a balanced budget—Congress and the President must take on the hard work of reforming entitlements and restraining spending. There truly is no other way.