Jul 16, 2014 - 3:45pm

Unsustainable Entitlement Programs Continue to Be Fiscal Threat


Senior Editor, Digital Content

Even though federal budget deficits are falling from outrageous to merely dangerous levels, the Congressional Budget Office’s (CBO) latest long-term budget outlook points the spotlight back on federal deficits and debt, as these headlines attest:

Robert Schroeder at Marketwatch reports:

In its new long-term budget outlook, the nonpartisan CBO said federal debt held by the public is now 74% of the economy and will rise to 106% of gross domestic product by 2039 if current laws remain unchanged.

In its last long-term budget outlook in September 2013, CBO said debt held by the public was 73% of GDP and projected debt would be 102% of GDP in 2039.

This is CBO being optimistic, since its projection assumes there will not be an economic downturn which would push up deficits temporarily, and it assumes that soaring government debt will not permanently drive up interest rates beyond CBO’s fairly benign forecast, thereby weakening the economy while pushing up federal interest outlays even further. What are the odds of avoiding recessions and much higher interest rates indefinitely?

The culprits of the growing debt are the usual characters: soaring interest expense and the big entitlement programs—Medicare, Medicaid, and Social Security—along with Obamacare. The CBO report states:

The pressures stemming from an aging population, rising health care costs, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP.

Social Security and spending on the government’s major health care programs will reach “a total of 14 percent of GDP by 2039, twice the 7 percent average seen over the past 40 years,” the CBO reports states.

As spending on entitlement programs and interest payments rises, other federal spending like defense, education, and infrastructure will be crowded out even if economy-crushing taxes are raised to offset a portion of the spending increase. In effect, the federal government will become a massive health and retirement benefits provider that just happens to have the world’s most-powerful, yet steadily-shrinking military.

Dr. Martin Regalia, the U.S. Chamber’s Senior Vice President and Chief Economist, explained “we do not appear to have a problem raising sufficient revenue. The real culprit behind rising deficits and debt levels is on the spending side.” CBO’s projection would concur. Tax revenues are expected to  rise to 19.5% of GDP by 2039. However, federal spending will then reach 26%.

 

Without entitlement reforms, CBO states that the national “debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.” Such massive federal borrowing would result in the private sector having less savings available to invest, leading to slower productivity growth and lower wages and thus to slower revenue growth – a very dangerous downward fiscal spiral.

We can avoid this looming fiscal crisis, but we need leadership in Washington to act sooner rather than later on reforming our entitlement programs.

For more on why we need entitlement reform read “10 Truths About America’s Entitlement Programs."

UPDATE: The Washington Post editorial board had this to say about the CBO report:

Some may take solace in the finding that debt relative to GDP has stabilized and will hover around the current 74 percent through 2020. But the CBO concluded that “federal debt held by the public is projected to grow faster than the economy starting a few years from now, and because debt is already unusually high relative to GDP, further increases could be especially harmful.” If that process of debt accumulation proceeds, the CBO reckons, debt as a percentage of GDP would rise to 106 percent 25 years from now. That level of indebtedness would have a variety of negative economic effects. Among them: The country might well be incapable of taking strong action to support the economy during the next crisis.

Follow Sean Hackbarth on Twitter at @seanhackbarth and the U.S. Chamber at @uschamber.

Photographer: Flickr user iandavid. Licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic license.

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About the Author

About the Author

Sean Hackbarth
Senior Editor, Digital Content

Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.