A late US summer budgetary nightmare
The Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) released new budget forecasts this summer that show the nation falling into an ever deeper financial hole. Unfortunately, very few Americans are aware this is happening. The media is distracted and hasn’t covered the federal budget outlook the way it has in prior years. Meanwhile, policymakers are acting as if the budget problem doesn’t exist because they don’t want to take responsibility for solving it.
The Trump administration’s new forecast, called the “mid-session review,” shows a sharp deterioration in the 10-year budget outlook compared to the projection released by OMB earlier this year. In February, OMB estimated that the federal government would run a cumulative “baseline” deficit over the period 2019 to 2028 of $10.8 trillion, assuming current laws and polices remain unchanged during this period. OMB’s new estimates, released in July, show a baseline deficit over the same period of $11.8 trillion, or $1 trillion more than was projected just six months ago.
OMB’s estimates of deficits based on the president’s proposals show a similar erosion. In February, the agency estimated that the president’s budget would produce a cumulative deficit of $7.1 trillion over the period 2019 to 2028. In the mid-session review, the estimated 10-year deficit for the president’s budget is $8.0 trillion.
Trump officials have had very little to say about rising deficits and debt, beyond a promise from National Economic Council Director Larry Kudlow that the administration will be tougher on federal spending in the future. The president never brings the subject up in public.
This month, CBO released a set of possible scenario for long-term budget forecasts covering the next 30 years. The results are even more startling than OMB’s 10-year forecast. These new scenarios are built on different assumptions from CBO’s base-case projection, the “extended baseline,” released in June. That projection assumes current laws and policies remain in effect indefinitely, which means revenue rises rather sharply beginning in 2026 because many of the individual income tax cuts enacted in 2017 are scheduled to expire at the end of 2025. Even with this assumption in place, the extended baseline shows federal debt rising from 78 percent of GDP this year to 118 percent in 2038 and to 152 percent in 2048.
As alarming as this scenario is, it is clearly too optimistic. Republicans are committed to permanently extending the tax cuts they passed last year, and history shows that Democrats are not particularly effective at reversing tax cuts once they have gone into effect. Further, the extended baseline scenario assumes Congress will keep appropriation spending in 2020 and 2021 within the caps that were enacted in the Budget Control Act of 2011. That’s not going to happen. Congress and the president just blew threw the caps for 2018 and 2019 by a combined $300 billion.
CBO identifies one of its new forecasts as the “extended alternative fiscal scenario.” In this scenario, all of the 2017 tax cuts are extended permanently, the tax on high-cost employer-based insurance plans (enacted in the Affordable Care Act) is repealed (it has already been delayed from 2018 until 2022), and spending on annual appropriations grows with inflation. With these assumptions, which are plausible, the federal government will run a budget deficit of 7.1 percent of GDP in 2028, up from 3.9 percent this year, and cumulative federal debt will climb to 105 percent of GDP in 2028, to 148 percent in 2038, and to 210 percent in 2048.
Americans should worry about running such large budget deficits on a sustained basis because they will slow economic growth and lower their incomes. As CBO notes, large budget deficits and growing debt crowd out private investment, and thus lower future productivity and income growth. Large deficits also push up interest rates, and thus raise federal borrowing costs. CBO estimates that, under the extended alternative fiscal scenario, real Gross National Product would be lower by between 0.2 and 2.5 percent in 2038 compared to the extended baseline, which already incorporates a slowdown in growth due to rising levels of federal debt.
The other two scenarios from CBO’s latest report show even sharper increases in federal debt than the extended alternative fiscal scenario because they assume lower levels of revenue based on historical experience.
Not too long ago, Republicans talked about balancing the budget in 10 years. That was never achievable, and it was the wrong goal anyway. Congress and the president should agree on targets for reducing debt as a percentage of GDP over the next three decades, and then begin to work on the reforms needed to hit those targets.
The budgetary hole is deep, but a handful of reforms would make a big difference. The ages of eligibility for Social Security and Medicare need to be recalibrated to reflect the longer lifespans of retirees. Medicare premiums should be higher for retirees with higher lifetime earnings. Medicare should also be converted into a premium support program, with the beneficiaries paying more for higher cost coverage and less for plans with lower premiums. Similarly, the tax break for employer-sponsored health insurance should be capped, which would provide an incentive for firms and workers to seek out lower cost options for insurance and medical care. Finally, Republicans would be smart to consider endorsing a carbon tax, both for the revenue it would raise and the effect it would have on climate change.
Enacting all of these policies at once would not be enough to solve the entire budget problem, but it would be a big step in the right direction. Of course, it won’t happen anytime soon since these reforms would mean lowering benefits and raising taxes for various voting groups. A deficit reduction plan would ideally include measures to strengthen, rather than weaken, the safety net, with higher benefits and lower taxes where appropriate. But including such provisions, wise as they may be, won’t make it much easier for politicians to support a large deficit reduction plan that, as a general matter, lowers benefits and increases taxes.
Given its complexity and the potential political costs, the budget problem is too big for either party to tackle on its own. At the moment, the deep partisan divide makes it hard to see how a deal might come together. Still, it’s a job that will have to be done at some point, even if it means some political careers come to a premature end.