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July 12 — The outlook for the federal government's long-term finances worsened over the past year, the Congressional Budget Office said.
In its annual report released July 12, the nonpartisan CBO said—as it has in past reports—the combination of spending growth in Medicare and Social Security, as well as increased interest costs, would push debt levels higher. This year, in addition, the agency said that much of the deterioration in the long-term outlook from 2015 to 2016 stemmed from passage of permanent tax cuts in the tax extenders bill in late 2015 (Pub. L. No. 114-92). The law made permanent many tax provisions that had been extended only temporarily.
The CBO said the changes that would be required to keep federal debt levels the same for the next 25 years would be much bigger. In its 2015 report, the CBO said spending cuts or revenue increases, or some combination of both, worth about $210 billion would need to be made annually for the next 25 years to keep debt at the same level as it is now.
Looking long term, the 25-year “fiscal gap” in 2015 was equal to about 1.1 percent of gross domestic product. In the new report, that figure increased to about 2 percent of GDP over the next 25 years.
“Much of that increase stems from reduced corporate and individual income taxes, resulting from the extension of tax provisions by the Consolidated Appropriations Act, 2016. Downward revisions to CBO’s economic forecast and technical changes have also, on net, increased projected deficits,” the CBO said.
The report also included a new measure of the fiscal gap—a 30-year window, including the projected feedback of changes in the U.S. economy on the budget bottom line, also known as dynamic scoring. Under those provisions, the size of spending or tax changes needed to keep the debt stable at about 75 percent of GDP totaled 1.7 percent, or about $330 billion annually from 2017 to 2046. Cutting the debt to its 50-year average would be even harder, with the needed changes totaling 2.9 percent of GDP, or about $560 billion.
To put that figure in perspective, the House Republican bill to fund the Pentagon for fiscal 2017 (H.R. 5293) totaled about $517 billion, not including money from an overseas warfighting account. That is a little more than half of annual discretionary appropriations.
“Today’s CBO report is a reminder that policymakers need to stop adding trillions of dollars to the federal credit card and work on bipartisan solutions that put our country on a more responsible budgetary path,” said Shai Akabas, director of fiscal policy at the Bipartisan Policy Center.
Other anti-deficit groups used the report to highlight what they see as a lack of attention to the deficit and the national debt during this year's presidential campaign. “The 2016 campaign is a perfect opportunity for candidates at all levels to propose and debate solutions to our nation’s long-term fiscal and economic challenges. Many solutions exist, and voters nationwide are calling on candidates to put forward responsible plans to secure America’s future,” said Michael Peterson, president of the Peter G. Peterson Foundation.
House Budget Committee Chairman Tom Price (R-Ga.) said the report showed the need to shore up entitlement programs.
“One wonders how anyone can look at this report and not feel compelled to take action. We have no choice. The Congressional Budget Office is sending yet another wake-up call, and policymakers better listen,” he said in a statement.
Not all the news in the report was bad, however. The CBO said it had revised down again its estimates of the impact of interest rates on the government's debt burden, especially after adjusting for inflation.
“The real rates on 10-year Treasury notes and the Social Security trust funds are projected to average 1.9 percent over the entire 30-year projection period and 2.2 percent in the final decade of the period,” the CBO said. “Last year, after accounting for the effects of fiscal policy in the extended baseline, CBO projected both rates to be 2.6 percent in 2040.”
CBO said the downward revision was due to a combination of factors, including new estimates of the risk associated with non-Treasury debt and estimates of the flow of foreign capital into the U.S.
Rudolph Penner, an Institute fellow with the Urban Institute think tank and a former CBO director, said long-term forecasts should be taken with a grain of salt. He said CBO forecasts 20 years ago missed the current low-interest rate environment, the brief period of budget surpluses in the late 1990s and early 2000s, as well we the impact of the Great Recession.
“Long-run forecasts are overall quite unreliable,” he said. Still, he said, policymakers should not pin their hopes on upside surprises, like the possibility of lower long-term interest rates. “Hoping for good surprises would be very unwise,” he said.
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