Over the long term, the CBO said, a projected explosion in government spending outside interest on the debt is “attributable entirely” to the ballooning cost of “Social Security, Medicare, Medicaid, and (to a lesser extent) insurance subsidies” intended to help finance coverage for the uninsured under President Obama’s new health-care law.
“The health care programs are the main drivers of that growth,” the CBO said, responsible for 80 percent of the projected rise in spending on those programs over the next 25 years.
Tax collections could keep pace with those costs if Congress permitted the George W. Bush tax cuts to expire on schedule in 2012 and allowed the alternative minimum tax to hit millions of additional households, the CBO said. But under current tax policies, the CBO said, tax collections would barely cover the cost of the health and retirement programs alone by 2035.
“If policymakers are to put the nation on a sustainable budgetary path, they will need to let revenues increase substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches,” the CBO report said.
The report cautions that taking either action now “would probably slow the economic expansion. However, the sooner that medium— and longterm changes to spending and revenues are agreed on— and the sooner they are implemented after the period of economic weakness — the smaller will be the damage to the economy from rising federal debt.”
And the economic damage of inaction could be huge, the CBO said. If current policies are unchanged and the national debt continues to grow, the U.S. economic output could be as much as 6 percent smaller than current projections by 2025 and as much as 18 percent smaller by 2035.
Despite the growing danger, both major political parties have declared their resistance to the types of policy changes that would be necessary to rebalance the federal budget, at least as part of the debt-reduction talks currently under way between Vice President Biden and six lawmakers from both parties.
Democrats have ruled out major changes to health and retirement programs, while Republicans have ruled out any increase in tax revenue, a position Senate Minority Leader Mitch McConnell (R-Ky.) emphasized Wednesday.
“I think I can safely say, this Congress is not going to raise taxes, so why are we still talking about it?” McConnell told reporters at a breakfast hosted by the Christian Science Monitor. “So, look, taxes aren’t gonna be raised.”
As a result, negotiations have focused primarily on a middle ground that includes agency spending and other kinds of direct payments to beneficiaries, such as farm subsidies, with a goal of producing just over $2 trillion in savings over the next decade.
Although savings of that magnitude would help, such a package would come nowhere near solving the nation’s budget problems. According to the CBO report, policymakers would have to come up with immediate and permanent savings of more than $700 billion a year — more than $7 trillion over the next decade — just to keep the debt at its current level of roughly 69 percent of GDP through 2035. Reducing the debt as a share of the economy would require even more dramatic changes.
On Tuesday, the chairman of the Senate Budget Committee complained that the emerging package would not “fundamentally change” the alarming rate of growth in the national debt and that it falls far short of the savings needed to avert a debt crisis.
“A $2 trillion package sounds big, but I think most serious observers would tell you that it takes a package of at least $4 trillion to fundamentally change the trajectory we’re on,” Sen. Kent Conrad (D-N.D.) told reporters. “In the context of our debt, which is nearly $15 trillion and is headed for $25 trillion, $2 trillion over 10 years does not do the job.”
Bipartisan negotiators led by Biden are rushing to draft a debt-reduction package to persuade reluctant lawmakers to raise the legal limit on government borrowing, now set at $14.3 trillion. Without additional borrowing authority, the government could default on its obligations starting Aug. 2. The White House and congressional leaders hope to raise the limit by just over $2 trillion to pay the bills through the end of next year.
Conrad said he would agree to raise the debt limit for no longer than six months without a more serious effort to reduce future borrowing. And he told reporters that he is recruiting like-minded senators to “send a very clear message that some of us are not going to vote for a long-term extension of the debt limit unless there is a credible plan” to reduce borrowing.
Conrad has long been a leader on budget issues and a determined champion of debt reduction. Last year, he organized a protest of more than a dozen senators that held up the last major increase in the debt limit until President Obama agreed to appoint a fiscal commission to develop a plan to stabilize the debt.
That commission produced a plan that would limit borrowing to a little over $5 trillion over the next decade. The framework under consideration in the Biden talks is likely to require more than $7 trillion in additional borrowing.
Conrad and five other senators, from both parties, had been trying to advance the fiscal commission’s plan, but that effort stalled after Sen. Tom Coburn (R-Okla.) left the group, saying its members were unable to agree on sharp cuts to benefits for retirees.
The remaining members are trying to decide whether to press their case despite opposition from leaders in both parties. So far, few have been willing to support Conrad’s stance. Even some like-minded lawmakers say negotiating $4 trillion in savings is virtually impossible before the Aug. 2 deadline.
“I think it’s too big of a lift,” said House Minority Whip Steny H. Hoyer (D-Md.). “I believe we need a comprehensive approach to this. But in the present time frame, that’s not possible.”
Hoyer said that “the majority of members of Congress understand that the debt-limit package will not end the necessity to act to confront the nation’s fiscal crisis.”
But Conrad argued that all incentive will be lost once the debt ceiling is raised.
“If they reach an agreement and that passes and the debt limit then does not have to be dealt with until after next year’s election, there will be very little appetite here to come back and do what really has to be done to get our financial house in order,” he said.
Conrad suggested raising the debt limit for a shorter period to give policymakers more time to tackle far-reaching overhauls of the tax code, as well as Social Security and Medicare, the biggest drivers of future debt. But Senate Majority Leader Harry M. Reid (D-Nev.) and House Majority Leader Eric Cantor (R-Va.) both rejected that idea Tuesday.
House Republican leaders say it would be extraordinarily difficult to persuade their skeptical troops to vote more than once for a debt-limit increase. And, Cantor said, the job of reducing the debt wouldn’t get any easier after a delay.
“I don’t see how multiple votes on a debt-ceiling increase can help get us to where we want to go,” Cantor told reporters. “We want big reforms. We want big spending cuts and big changes to how this town works. ... If we can’t make the tough decisions now, why would we be making those tough decisions later?”