The Fiscal Prognosis
By Bryan Caplan
Here’s how bad the CBO’s now expects the long-run fiscal crisis to be:
The unsustainable nature of the federal tax and spending policies specified in current law presents lawmakers and the public with difficult choices. Unless substantial changes are made to the major health care programs and Social Security, spending for those programs will equal a much larger percentage of GDP in the future than it has in the past. At the same time, under current law, spending for all other federal benefits and services would be on track to make up a smaller percentage of GDP by 2024 than at any point in more than 70 years. Federal revenues would also represent a larger percentage of GDP in the future than they have, on average, in the past few decades. Even so, spending would soon start to outpace revenues by increasing amounts (relative to GDP), generating rising budget deficits. As a result, federal debt held by the public is projected to grow faster than the economy starting a few years from now, and because debt is already unusually high relative to GDP, further increases could be especially harmful.
What would it take to avert crisis, starting in 2015?
To put the federal budget on a sustainable path for the long term, lawmakers would have to make significant changes to tax and spending policies: reducing spending for large benefit programs below the projected levels, letting revenues rise more than they would under current law, or adopting some combination of those approaches.
The size of such changes would depend on the amount of federal debt that lawmakers considered appropriate. For example, lawmakers might set a goal of bringing debt held by the public back down to the average percentage of GDP seen over the past 40 years–39 percent. Meeting that goal by 2039 would require a combination of increases in revenues and cuts in noninterest spending, relative to current law, totaling 2.6 percent of GDP in each year beginning in 2015 (without accounting for the economic effects of the reduction in debt or of the policy changes that might be used to achieve it); in 2015, 2.6 percent of GDP would equal about $465 billion. If those changes came entirely from revenues, they would represent an increase of 14 percent from the revenues projected for the 2015-2039 period under the extended baseline. If the changes came entirely from noninterest spending, they would represent a cut of 13 percent from the amount of noninterest spending projected for that period. A similar level of debt in 2039 would result under the third scenario discussed above (a $4 trillion total reduction in deficits excluding interest payments through 2024, with the amount of deficit reduction in 2024 as a percentage of GDP continuing in later years).
Bottom line: Not a catastrophe yet, but a probable catastrophe given the myopia of American democracy.