Budget Outlook Getting Worse, CBO Report Shows

Patrick Louis Knudsen / January 31, 2012

The figures released today by the Congressional Budget Office (CBO) once again reflect the magnitude of the federal government’s fiscal problem and the urgent need for Congress and the President to address it. Some key points:

• The 2012 deficit, projected at $1.079 trillion, represents the fourth consecutive year of deficits exceeding $1 trillion.

• Debt held by the public today is $11.2 trillion, or 72.5 percent of gross domestic product (GDP)—nearly three-fourths of total economic output.

• This year’s $3.6 trillion in spending is 23.2 percent of GDP—nearly one-fourth the size of the economy and well above the average spending level of 20 percent of GDP.

For the 10 years covered by the report (2013 through 2022), CBO’s conventional figures vastly understate the magnitude of the problem, because CBO employs several unrealistic assumptions in its estimates. Among them: It assumes the Bush tax cuts will expire at the end of this year as scheduled, and the Alternative Minimum Tax will broaden to ensnare a greater number of taxpayers. It also assumes Congress will allow a sharp reduction in payments to Medicare physicians.

These assumptions are highly unlikely. Consequently, CBO developed an alternative fiscal scenario based on more realistic assumptions and therefore closer to the likely fiscal outcomes over the next 10 years. CBO’s alternative projections include the following:

• For 2012, spending is roughly equal to the conventional estimate, at $3.6 trillion.

• Spending rises from 23 percent of GDP today to 24.4 percent in 2022. Spending has reached this level only two other times since World War II.

• Deficits through the decade never fall below 4.9 percent of GDP, and the lowest deficit in the period is $899 billion, reached in 2015. After that, deficits rise again, reaching $1.5 trillion in 2022, or 6.1 percent of GDP.

• Debt held by the public grows through the 10-year period and reaches a chilling $23.2 trillion (94.2 percent of GDP), more than twice this year’s debt of $11.3 trillion.

• Although revenues are low now due to economic weakness, they will rise to 18 percent of GDP, their historical average, by 2017—and continue to rise from there.

Either scenario demonstrates an urgent need for action by Congress or the President to curb the government’s runaway spending.

The Entitlement Problem

The core of the problem is spending. In CBO’s more realistic assumptions, spending continues growing at unsustainable rates, rising from $3.6 trillion this year to $6 trillion in 2022, or 24.4 percent of economic output. Tax revenues will rise above their historical levels—even with the Bush tax cuts made permanent. Thus, it is this relentless spending that results in continuing deficits near or above $1 trillion throughout the decade.

The principal drivers of this spending are the entitlement programs, especially Medicare, Medicaid, and Social Security. These three programs alone will cost $1.592 trillion this year, about 44 percent of total federal spending. By 2022, if they are not reformed, these programs will total $2.991 trillion, almost half the budget (49.8 percent).

Obamacare added even more entitlement spending. The health insurance subsidies and exchanges in the program add a whopping $645 billion in spending over the next 10 years, and his expansions of the State Children’s Health Insurance Program add another $78 billion.

These figures are further evidence that Congress and the President must begin restructuring these programs soon. With every month of delay, the spending problem grows larger, and the actions needed to fix it become more wrenching.

Reckless Defense Cuts Keep Mounting

CBO’s report also reflects the devastating spending cuts that still hang over national defense. The Budget Control Act (BCA)—a product of last year’s debt ceiling debate—resulted in two rounds of planned defense reductions. The first comes from spending caps, which reduce spending by $840 billion through 2021. Depending on how those reductions are distributed among discretionary programs, they could reduce defense resources over the period by somewhere between $445 billion (6.8 percent) and $825 billion (13.2 percent).

Second, because the BCA-created “super committee” failed to propose any further spending reductions, the BCA imposes a crude, automatic spending cut, called a “sequester,”  totaling $1.2 trillion from 2013 through 2021. Of that amount, $492 billion is to come from defense.

These reckless reductions are further crippling military readiness. Congress should rewrite this sequester promptly to find the $1.2 trillion in savings elsewhere, so that national security is not devastated. In the end, CBO’s report today is more of the same: The nation has a spending and debt crisis, and it is getting worse.