Aug 9, 2018
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CBO’s updated long-term budget projections are grim

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In June of this year, CBO laid out the projected fiscal health of the federal budget over the coming decades in their 2018 Long Term Budget Outlook report.  This report project’s “extended baseline” scenarios that assume that all laws on the books will be implemented as written.  For instance, if there is a spending bill to fund a program over 10 years and then have the program end, the extended baseline projection assumes this will happen…even if it is more likely that the program will be continued in some form in year 11.  Similarly, if there are income tax cuts intended to last 10 years, the extended baseline current law scenario requires the government to assume that the tax cuts will be rescinded in year 11 even when that may not be the case.  In that report:

CBO projects debt held by the public will roughly double as a share of the economy under current law, from 78 percent of GDP at the end of 2018 to 152 percent of GDP in 2048 – an unprecedented level.

Unfortunately, that is the optimistic view.  The CBO’s recently released it’s alternative scenarios that–although not reflective of current law–are more reflective of what is likely to occur in the future. Although CBO considers three alternative scenarios, the key provisions of each are that they maintain in place the Trump tax cuts which are due to expire in 2026.

Under all three alternative scenarios, debt as a percentage of GDP would be much higher than the 118 percent of GDP projected under the extended baseline (see Figure 1 on page 2). In 2038, it would equal 148 percent of GDP under the first scenario, 151 percent under the second, and 165 percent under the third.

In the worst case, we could expect debt to more than double as a share of GDP (165%) compared to where it stands today (78% of GDP). Even the most conservative alternative scenario would represent a 90 percent increase in the debt load relative to the overall economic activity.

While the alternative scenarios focus largely on the Trump tax cuts, health care is also a key driver of the large federal debt.  As stated in the June 2018 report:

Major Trust Funds Are Headed Toward Insolvency. CBO projects the Highway, PBGC Multi-Employer, Social Security Disability Insurance, Social Security Old-Age and Survivors Insurance, and Medicare Hospital Insurance trust funds will all be exhausted by 2032 without action to stabilize their finances.

In short, we need to cut spending or increase revenues (i.e., raise tax rates or increase GDP) in order to slow the growing debt burden for future generations.

 



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CBO · Long-term budget outlook · LTBO · Public Policy

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