CBO Long-Term Budget Report: Our Dire Fiscal Situation

Alison Acosta Fraser / Emily Goff / June 22, 2011

Today’s release of the 2011 Long-Term Budget Outlook by the Congressional Budget Office (CBO) yet again confirms what we already know: America’s budget is continuing down an unsustainable path, and the longer we wait to address this problem, the more painful the policy fixes will have to be.

The CBO presents its results under two sets of assumptions, and while the assumptions differ, the bottom line result is the same: Spending continues to spiral out of control and the increase in the nation’s debt would be catastrophic.

Under the more likely alternative fiscal scenario:

• Debt reaches 101 percent of GDP by 2021—two years earlier than last year’s outlook reported—and would, if markets permitted it, shatter the 200 percent mark in 2037;
• Interest on the debt jumps from 1.4 percent to 4.4 percent of GDP in 10 years and reaches 8.9 percent by 2035;
• Total spending remains well above its historical average of 20.3 percent, rising to nearly 26 percent of GDP by the end of the decade; it surges to 33.9 percent by 2035, climbing inexorably higher after that;
• Taxes return to their historical average of 18 percent of GDP by 2017 and then rise to 18.4 percent.

Even CBO’s more modest extended baseline scenario casts a gloomy shadow over the nation’s fiscal picture. Our ever-accumulating debt surpasses two-thirds of the economy by 2021 and hits 84 percent by 2035. Federal spending continues to exceed federal revenues by an average of about four percentage points over the next 10 years.

If that’s not bad enough, our fiscal crisis is actually worse than the report shows. CBO models do not take into account changes that happen in the economy and the lives of ordinary Americans. The Director’s Blog on the report states that the projections “understate the severity of the long-term budget problem because they do not incorporate the negative effects that accumulating additional federal debt would have on the economy, nor do they include the impact of higher tax rates on people’s incentives to work and save.”

More bad news in the report? Rising levels of debt, like those found in the President’s budget, have other “negative consequences,” including increased interest rates and the likelihood of a “sudden fiscal crisis during which investors lose confidence in the government’s ability to manage its budget.”

No surprise either is that the growth in spending is attributed to an aging population and growing health care spending—in other words, the lack of Medicare, Medicaid, and Social Security reforms. Health care spending (Medicare, Medicaid, SCHIP, and the Obamacare subsidies) increases from 5.6 percent of GDP in 2011 to 7.1 percent in 2021 and to 10.3 percent by 2035.

Meanwhile, Social Security spending rises from its current level of 4.8 percent to 5.3 percent of GDP by 2021 and hits 6.1 percent by 2035. The three major entitlement programs account for nearly 48 percent of total spending by 2021, up from 43 percent. Clearly these trends cannot continue.

The decisions of the President and his Senate ally Harry Reid to put off fixing our nation’s spending problem and stabilize the debt is only making matters worse. When someone has a serous illness and holds off on seeing a doctor, he or she only grows more ill and requires a more drastic and potentially painful cure. In the same way, so does delaying action on getting spending and the debt under control further weaken the economy, stifle job growth, and injure investor confidence. And, as CBO starkly reports:

Waiting to close the fiscal gap would make the necessary changes larger.… Postponing action would substantially increase the size of the policy adjustments needed to put the budget on a sustainable course.

In other words, the longer Congress dithers, the larger and more draconian the fixes must be.

CBO’s findings tell the nation what it already knows and what voters are demanding: Tough decisions must be made to cut spending, reform the entitlement programs, and return to a habit of responsible budgeting in Washington. Solutions in The Heritage Foundation’s Saving the American Dream would do just that. The economic security of our seniors and the economic freedom and opportunity of future generations depend on Washington making such wise decisions. Americans today deserve—and expect—nothing less.