Choosing the Nation's Fiscal Future (2010) / Chapter Skim
Currently Skimming:
1 The Long-Term Challenge
1 The Long-Term Challenge
Pages 9-34
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From page 9... ...
Three major programs that primarily serve the elderly and many people of modest means -- Medicare, Medicaid, and Social Security -- are largely responsible for the projected growth of spending. Medicare and Medicaid have been growing faster than either revenues or the economy for some time, driven by enhanced benefits, rapid growth of health care costs, and, more recently, by aging of the U.S.
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. The challenge posed by this growth of spending will be compounded by the projected slowing growth of the labor force that is a direct result of the aging of the U.S.
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THE BUDGET OUTLOOK Largely because of the severe downturn in the economy that began in 2008, the federal government borrowed $1.4 trillion in fiscal 2009 to pay for current spending, and it is expected to run an annual deficit in excess of $1 trillion for at least 1 more year. After the unprecedented deficits of 2009 and 2010, the economy's recovery will reduce the annual deficit, although
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at the end of 2008 and approaching 55 percent just 1 year later, will continue to grow; see Box 1-2 on the debt and the deficit. Using information as of June 2009 (Congressional Budget Office, 2009e)
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They estimate the budget effects of current policies if they are continued over a long period -- what is commonly referred to as a budget baseline; see Box 1-3. CBO's June 2009 long-term outlook reached the same basic conclusion as its previous updates, that "under current law, the federal budget is on an unsustainable path" (Congressional Budget Office, 2009e:1)
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, in its annual long-run budget outlook published in April 2009, also says that "increasing health costs and the aging of the population will place the budget on an unsustainable course without changes in policy to address these challenges" (U.S. Office of Management and Budget, 2009a:191)
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From page 15... ...
Of course, uncertainties surround any budget forecast, especially over a long horizon; see Box 1-4. Each update changes the picture slightly, without changing the basic conclusion; for example, CBO's August 2009 update of its 10-year baseline increased the projection of cumulative deficits over 10 years by about $1.5 trillion relative to its March estimate (Congressional Budget Office, 2009a, 2009g)
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Yet there is a major difference in the post-World War II situation and the current situation. For one thing, labor force growth now is slowing (with the retirement of baby boomers)
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The slowdown in workforce growth not only means a rise in the proportion of the population who are recipients of federal retirement and health benefits, but also a long-term slowing of economic growth. A smaller proportion of the population working also means that, absent other changes, federal income and payroll tax revenues will grow more slowly than they have in the past.
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led to the "stimulus" legislation, including new temporary tax provisions and spending, and to a variety of new federal authority to provide financial support for or to rescue private financial institutions and provide relief for homeowners facing default; and (4) temporarily reduced inflation and interest rates.2 The jump in deficits and borrowing resulting from the downturn may be only temporary, but the extra trillions of debt that will have accumulated in that period will be a lasting burden.
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These are part of a broader class of federal programs (commonly referred to as "mandatory spending programs") for which the level of spending is not determined through annual congressional appropriations; instead, absent a change in policies, spending Net interest 8% Social Security 21% Nondefense discretionary 17% Medicare 13% Defense Medicaid discretionary 7% 21% Other mandatory 13% FIGURE 1-4 Federal outlays in fiscal 2008.
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As noted above, their costs are projected to continue growing faster than federal revenues and the economy in the decades ahead. Over the same period, other noninterest spending declined from 15 percent to less than 11 percent of GDP; see Figures 1-5B and 1-5C.
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Net Interest 12 12 10 10 8 8 6 6 Percentage of Percentage of 4 4 Gross Domestic Product Gross Domestic Product 2 2 0 0 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 FIGURE 1-5 Federal spending as a percentage of GDP, 1962-2008. SOURCE: Data from U.S.
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Social insurance taxes are dominated by the 15.3 percent payroll tax that workers and their employers pay for Social Security and the Medicare Hospital Insurance programs. For most workers, in fact, social insurance taxes are higher than income taxes (Congressional Budget Office, 2007a)
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Few economic experts would forgo strictly temporary increases in federal spending, deficits, and debt in an economic downturn as severe as this one. Such deficits are countercyclical -- they help moderate the societal effects of a recession that might otherwise be far harsher, and they may speed BOX 1-5 Tax Expenditures An invisible component of charts like Figure 1-6 -- because no one has figured out how to depict negative slices of pie -- is tax expenditures.
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Those tax cuts significantly increased deficits, and their indefinite extension for people with incomes below $250,000 -- as proposed by President Obama and assumed in the committee's study baseline -- would increase annual deficits beyond what they would otherwise be over the next decade by an average of 1.3 percent of GDP.4 Although those policy choices made the long-run fiscal outlook worse, the roots of the problem go deeper and carry no particular political brand. The three large entitlements whose projected growth is largely responsible for the budget's unsustainable course are part of a major expansion of the federal government's commitments to provide income support and health insurance to the old and the disabled.
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From page 25... ...
Tax expenditures for employer-provided health benefits have fueled the growth and generosity of private insurance plans, adding to the rising total of federal subsidies for health while reducing revenues.6 And medical science has advanced to provide far better, but also far more costly, treatments and services. Given that Social Security and Medicare were known to be structured in a way that allowed their costs to grow faster than tax revenues, the difficult question is why policy makers have been so slow to address their lack of sustainability.
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Looking out to 2050, CBO noted that the expected increase in the number of beneficiaries of federal programs for the elderly and a slowing in the rate of growth of the labor force -- combined with the anticipated growth in the per-person cost of Medicare -- would put enormous pressure on the budget. Its report (Congressional Budget Office, 1996:xxii)
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, although this proportion is lower than two or three decades ago. In a 2008 Pew survey, cutting middle-class income taxes was ranked 15th in importance in a list of 20 issues, although this survey was conducted prior to the current major recession.
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Political incentives for additional borrowing could change quickly if financial markets began to penalize the United States for failing to put its fiscal house in order. And because the recent economic downturn has been worldwide, all interest rates have trended down, while investors have favored U.S.
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Treasury debt, large deficits and debt can have a corrosive effect. And even without a crisis of confidence in the ability of the United States to manage its fiscal problem, chronic large deficits erode the growth of future living standards by reducing national savings, thereby slowing the accumulation of wealth (see Congressional Budget Office, 2005b)
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Wages subject to Social Security taxes are projected to fall from 38.5 percent of GDP in 2008 to 33.1 percent in 2083, in part because of a projected increase of nontaxable employer-provided benefits as a share of total compensation (Congressional Budget Office, 2009e; Lavery, 2009)
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economic activity, but the effect is so modest that even if immigration doubled or tripled from the current rate, it would make only a small long-term contribution to incomes and therefore to federal revenues (see Congressional Budget Office, 2005a:3; Council of Economic Advisers, 2007; National Research Council, 1997) .9 Not only is there no easy way out of the nation's fiscal problems, but the challenge now facing the United States is arguably worse than standard analyses suggest.
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In a sense, all of the other goals that people value and pursue through government already are hostage to finding a politically feasible way to address the looming fiscal challenge. The committee believes that this report will be helpful to both the public and the nation's leaders in addressing the fiscal challenge through a distinctive approach: • We present a range of possible paths rather than a single so lution.
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The economic downturn has complicated the fiscal challenge. Right now the nation faces an extraordinary clash between demands for expanded government and the inconvenient reality that commitments already made are expected to consume all the available revenues and then some.
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8. For details of the CBO analysis, including estimates of what would happen by offsetting this spending growth entirely through cuts in other programs, see Congressional Budget Office (2008g)
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