Committee for a Responsible Federal Budget

CBO Director Lays Out Budget Challenges for Conference Committee

Nov 13, 2013 | Budgets & Projections

At the second meeting of the budget conference committee earlier today, CBO director Doug Elmendorf was on hand to present the budget and economic outlook and to answer (as it turned out many, many) questions from the conferees. Throughout, Elmendorf made clear that our debt problems are still far from solved and that the committee has many options before them to consider, including those illusrated today in CBO's newly released Options for Reducing the Deficit.

Elmendorf made clear to the committee that while the near-term budget outlook showed falling deficits in the coming years, that would not last for long.

Although deficits will fall to 2 percent of GDP by 2015, they will then begin to increase again reaching 3 1/2 percent of GDP or nearly $1 trillion by 2023. Moreover, under the Extended Baseline in our long-term outlook, deficits continue to increase beyond the coming decade. As a result, federal debt held by the public...would reach 100 percent of GDP 25 years from now even without accounting for the harmful economic effects from that increase in debt.

He also outlined the consequences associated with elevated debt, even at the level we have right now. We have gone through a number of these concerns while discussing why lawmakers should put debt on a downward path as a percent of GDP.

There are at least three reasons why we and other analysts are concerned about the long-term budget outlook. First, debt is already larger relative to the size of the economy than at any point in our history except for a brief period around World War II. Even if debt remains near its current 73 percent of GDP, future wages and income will be lower than they would be with less debt. Also, the government's interest costs will rise dramatically as interest rates return to more normal levels. Your ability to use fiscal policy to respond to future financial crises, recessions, and international threats will be much more constrained. And the risk of a fiscal crisis will be higher than it would be with less debt. All of those problems with keeping debt at its current share of GDP will be worse if debt rises significantly and persistently relative to the size of the economy....We project that under current law debt will rise significantly and persistently relative to the size of the economy.

Elmendorf also pointed out how the composition of federal spending will change over time. Specifically, he noted that the increases in spending on health care programs and Social Security would put pressure on other federal spending and/or necessitate higher revenue.

All other non-interest spending taken together -- everything other than Social Security and Medicare and defense -- will be roughly the same share of GDP in 2023 on average that it was in the past 40 years and that it is today. I want to make it clear that the steadiness of this GDP share of the "all other" category masks very different patterns among its subcomponents....In this other category, means-tested health care programs are taking a growing share of GDP, owing to the expansion of insurance coverage through the Affordable Care Act and rising health care costs per person. In contrast, non-defense discretionary spending is on track to be a sharply shrinking share of GDP, owing in part to the caps from the Budget Control Act....If [Social Security and Medicare] are not cut back, then we will need to collect a rising share of GDP in tax revenues relative to our history or cut back on other federal benefits and services relative to what we have been accustomed to.

He also noted that "outlays for defense and non-defense discretionary programs would be smaller relative to the size of the economy in 2017 and beyond than at any point in at least 50 years", while pointing out that non-defense discretionary spending was half made up of spending on investment and that cuts to this area would harm the economy's potential capacity.

Elmendorf's comments should highlight for the committee the need to not only replace the sequester with longer-term savings, but to also work towards a comphrensive solution that addresses our long-term debt challenges. Importantly, he also said a follow up blog post about his testimony, that while he knows the picture he paints is dire, the committee should not shy away from using this opportunity to make progress.

I finished by noting that, when I make presentations like this, I worry that my toting up of all those challenges can make the problems seem so large that it actually discourages people from tackling them. That would be unfortunate. Of course, a clear resolution of the long-term budgetary concerns would be beneficial. But even if that is not feasible right now, reallocating elements of the budget to comport better with the country’s priorities as lawmakers view them, while reducing uncertainty about fiscal policy next year and improving or at least not worsening the long-run budget outlook, would be a good thing—even if it left significant challenges to be addressed in next year’s budget process.