It isn't getting much coverage, but the Congressional Budget Office has just issued its latest long-term budget outlook. Frankly, there's not much news here. The long-term prospect is bleak. The basic question remains: How much will the costs of retiring baby boomers crowd other federal programs, raise taxes or perpetuate large (and probably unsustainable) budget deficits? Without any appealing solutions, there's deadlock. Until this changes, the CBO's projections — updated periodically — are necessarily déjà vu.
Still, the report (“The 2012 Long-Term Budget Outlook”) provides a useful tutorial for the budget problem. Here's a quick overview.
Ballooning deficits since 2008 mainly reflect the financial crisis and Great Recession. But no one should doubt that future budgets remain hostage to an aging population and soaring health costs. In 1975, Social Security, Medicare and Medicaid — the three big programs for the elderly — represented 27 percent of non-interest federal spending, says the CBO. For the past decade, they've averaged 46 percent of non-interest spending. And by 2022, these programs (plus subsidies for President Obama's health program) could total 62 percent of that spending. Geez: nearly two-thirds of programmatic spending.
Almost everything else gets squeezed. In 2022, defense spending is assumed to shrink to 3 percent of the economy (gross domestic product), rivaling the lowest share since before World War II. All other spending — food stamps, veterans' benefits, road construction, U.S. attorneys — is projected to drop 40 percent to 4.3 percent of GDP in 2022.
Given these sizable reductions, you might think that the 2022 budget would be balanced and that tax cuts would be possible. Guess again.
The CBO does two projections. One assumes that most tax cuts adopted under Presidents Bush and Obama expire as scheduled (usually at the end of 2012). This results in a tax hike of about 15 percent when compared with the average tax burden of the past four decades. In today's dollars, the annual tax increase totals about $400 billion. Despite this, a modest deficit remains in 2022 equal to 1.2 percent of GDP, or $180 billion in today's dollars.
The other projection assumes that tax cuts are extended and that some planned spending cuts are reversed. The good news (obviously) is that taxes don't go up; the bad news is that deficits do. In fact, they explode. In 2022, the deficit is almost 6 percent of GDP, or nearly $900 billion in today's dollars. Many economists assume that routine deficits of this magnitude — the economy is assumed to be at "full employment" in 2022 — are unsustainable.
At some point, private investors wouldn't buy U.S. Treasury bonds except at exorbitant interest rates. Already, the ratio of publicly held federal debt to GDP has risen sharply, from 40 percent in 2008 to about 73 percent now. Under CBO's most pessimistic projection, it would hit 93 percent in 2022.
There, in a nutshell, is the budget problem. The elderly are crowding out everything else. But because they're numerous and sympathetic, hardly anyone wants to cut their benefits. There's a standoff on other remedies. Republicans resist any tax increases; Democrats oppose deep spending cuts. Everyone deplores large deficits, though in the short term many regard them as necessary to prop up the economy.
It's a familiar formula for stalemate — and definitely not "news."