“That was going to happen — the baby boomers retiring was going do that. These deficit — trillion-dollar projections have been out there for a long, long time. Why? Because of mandatory spending, which we call entitlements. Discretionary spending under the CBO baseline is going about $300 billion over the next 10 years. Tax revenues are still rising, income tax revenues are still rising, corporate income tax revenues — corporate rate got dropped 30 percent, still rising. Mandatory spending, which is entitlements, that grows $2 trillion over the next decade. Why does it grow $2 trillion? Because the boomer generation is retiring and we have not prepared these programs.”
— House Speaker Paul D. Ryan (R-Wis.), in remarks on NBC’s “Meet the Press,” April 15, 2018
Speaker Paul D. Ryan, who has announced his retirement, made these comments in response to a jab by host Chuck Todd at the longtime fiscal hawk: “You walk away with trillion-dollar deficits as far as the eye can see.”
There is a lot of inside-the-Beltway verbiage in his response, so as a reader service, we will dissect it.
“That was going to happen — the baby boomers retiring was going do that. These deficit — trillion-dollar projections have been out there for a long, long time. Why? Because of mandatory spending, which we call entitlements.”
The Congressional Budget Office recently announced the federal budget deficits would be bigger than previously estimated, largely because of the tax law that Ryan pushed through Congress in 2017. For the next 10-year period, the cumulative deficit is estimated to be $1.6 trillion larger than the $10.1 trillion, 10-year deficit announced last June.
The deficit in 2020 is expected to top $1 trillion, though it comes close to that in 2019. That’s what Todd was referencing.
But while that’s bad, the June CBO report had pegged the deficit topping $1 trillion in 2022. So the practical effect is that the $1 trillion deficit moved up two years.
As we often remind readers, raw numbers can be misleading. It’s more important to look at the deficit as a percentage of the gross domestic product. It is estimated to be 4.6 percent of GDP in both 2019 and 2020, whereas in the June report it would not have hit that level until 2025.
Ryan’s excuse is that the retirement of the baby-boom generation was going to put pressure on the government’s finances and that this has been known for a long time. What he does not explain is why it was necessary to make the deficit situation even worse just as the full force of baby-boom retirements takes effect.
Moreover, while Ryan pins the blame on “entitlements” — Social Security, Medicare, Medicaid and the like — a major issue is that revenue is much less than the CBO has projected in the past. As an example, in 2009, the CBO projected that the deficit in 2019 would be $235 billion, or 1.1 percent of GDP; now it is projected to be $981 billion, or 4.6 percent of GDP.
The reason for the difference is not entitlements. In 2009, the CBO assumed mandatory spending in 2019 would be $2.9 trillion (13 percent of GDP), but now it is projected to be $2.7 trillion (12.9 percent of GDP). Discretionary spending is also a little less than anticipated.
The big shift is revenue: The CBO in 2009 thought revenue would be $4.5 trillion in 2019 (20.2 percent of GDP), but now it’s estimated at just $3.5 trillion (16.5 percent of GDP), mainly because individual tax collections are $700 billion less than anticipated owing to the impact of various tax deals over the years.
“Discretionary spending under the CBO baseline is going about $300 billion over the next 10 years.”
Yes, discretionary spending is anticipated to grow from $1.3 trillion in 2018 to $1.6 trillion in 2028. But this is an example of big numbers that are meaningless to ordinary people. Within the context of $56 trillion of spending over 10 years, $300 billion is relative chicken feed.
As we noted, percentage of GDP is the best measure of spending over time. Discretionary spending was 6.3 percent of GDP in 2017 — and would be 5.4 percent in 2028. So, rather than growing, it would be a smaller part of the federal pie.
“Tax revenues are still rising, income tax revenues are still rising, corporate income tax revenues — corporate rate got dropped 30 percent, still rising.”
Here, Ryan says that tax revenue will continue to rise despite the tax cuts. That’s correct in raw dollars, vs. a baseline. But it belies the fact that the new tax law greatly reduced revenue, despite claims that it would pay for itself. In June, for instance, the CBO said that tax revenue would account for 18.3 percent of GDP in 2025; now it says it would be 17.5 percent in 2025.
We choose 2025 because after 2025, the revenue estimates start to veer into possible fantasy. The CBO bases its estimates on current law, and the tax law has individual tax cuts expiring in 2025, even though Republicans say they assume the cuts will be extended by a future Congress. When one looks at the “alternative scenario” offered by the CBO, which assumes that the tax cuts will stay in place, individual tax revenue grows at a slower pace. (Ryan’s staff notes that tax revenue in 2025 would be 17.5 percent of GDP, higher than a 50-year average of 17.4 percent calculated by the CBO.)
Corporate tax revenue initially rises but then essentially stalls after 2025: $447 billion in 2025, $449 billion in 2026, $431 billion in 2027 and $448 billion in 2028.
“Mandatory spending, which is entitlements, that grows $2 trillion over the next decade. Why does it grow $2 trillion? Because the boomer generation is retiring and we have not prepared these programs.”
As Ryan says, mandatory spending is estimated to increase from $2.5 trillion (12.7 percent of GDP) in 2018 to $4.5 trillion (15.2 percent of GDP) in 2028.
The deficit in 2028 is estimated to be about $1.5 trillion. As noted, it would actually be higher — almost $400 billion higher — if one assumes the individual tax cuts will be extended, as Ryan has said they will. So that’s close to a $2 trillion deficit in 2028.
Revenue does not keep up with mandatory spending, but another big reason for the increase in the deficit is the additional interest that will need to be paid on the new debt issued by the U.S. Treasury. Interest on the debt is anticipated to cost $915 billion in 2028, or 3.1 percent of GDP. (Extending the tax cuts would bring the debt service to $952 billion.) By contrast, the defense budget would be smaller in 2028 — $769 billion, or 2.6 percent of GDP.
The baby-boom generation is retiring, and Congress at best has taken only modest steps to rein in spending on old-age programs, largely because any serious effort is met with hostility and often-misleading attack ads.
The Affordable Care Act, opposed by Ryan, did restrain growth in Medicare, which led to political attacks; similarly, Democrats continue to run attack ads against ‘Social Security privatization” even though the ill-fated George W. Bush plan to add private accounts to the retirement plan died in 2005. The House in 2017 passed a repeal of Obamacare that also would have overhauled Medicaid, but the plan died in the Senate.
But the revenue side of the picture cannot be ignored. Even if revenue would hit a 50-year average as a percentage of GDP, mandatory spending in the past was a much smaller share of the U.S. economy, according to the historical tables maintained by the White House budget office. In 1968, when tax revenue was 17 percent of GDP, mandatory spending was 6.4 percent; in 1978 and 1988, tax revenue was about 17.5 percent and mandatory spending was about 9.6 percent.
Since then, tax revenue has hovered around 17 or 18 percent of GDP, but mandatory spending has continued its forward march: 10.1 percent of GDP in 1998, 11.4 percent in 2008 and anticipated to be 13.3 percent in 2018 and 15.4 percent in 2028. Congress has not been able to grapple with the spending — and keeps taking steps to undermine the revenue flow as well.
That’s how you end up with budget deficits.
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