CBPP: Long-Term Budget Outlook Remains a Challenge
The Center on Budget and Policy Priorities (CBPP) released a new set of long-term debt projections today. They find that while the debt will remain stable at about 74 percent of GDP through 2020, it will rise significantly thereafter, reaching 89 percent of GDP by 2030 and exceeding 100 percent by 2040.
As CBPP notes, these projections represent a significant improvement over outlooks from earlier in the decade, particularly because of the enacted deficit reduction and the slowdown in health care cost growth. However, with debt levels at a post-war record high already, this rise in debt levels is quite troubling. As CBPP explains, "A rising debt ratio in good times reflects an unsustainable budget policy that ultimately poses threats to financial stability and long-term growth."
CBPP's projections begin with CBO's most recent ten-year projections, adjusting them to assume the restoration and extension of the normal tax extenders, the continuation of expiring refundable credits, and a drawdown in war spending. Beyond 2024, they assume Social Security and Medicare will grow as the Trustees (rather than CBO) project and that non-health, non-retirement spending will grow with inflation and population growth.
These assumptions put CBPP near the middle of our range of projected debt outcomes through 2030 or so, though their debt projections after 2036 fall below our range of estimates.
Of course, given the policy uncertainty surrounding the budget, there are a number of ways in which CBPP's projections may be too optimistic or too pessimistic. The debt situation would be noticeably improved if lawmakers would instead abide by pay-as-you-go rules in full, including for the tax extenders and refundable tax credits. On the other hand, the fiscal situation would be significantly worse if lawmakers continue to extend bonus depreciation; if they enact doc fixes or sequester relief with no offsets, phony offsets, or offsets that take place several years in the future; if Medicare and Social Security grow as CBO expects (as opposed to the Trustees' projections); if other parts of the budget grow faster than inflation plus population (for example, with GDP); or if policymakers prevent the natural growth of tax revenue from certain features of the tax code.
CBPP's projections show how the composition of spending will also change somewhat dramatically over time. Resources will increasingly go to Social Security, health care spending, and interest on the debt, as opposed to defense spending, non-defense discretionary, and non-health non-retirement mandatory programs.
One interesting point that the report makes is how the budget picture can be improved if lawmakers address the solvency of the Social Security and Medicare Hospital Insurance trust funds. By assuming that the trust funds are kept solvent after 2033 and 2026 (spending and revenue in each are equal) respectively, the path of debt actually reverses in the 2030s, declining from a peak of 90 percent of GDP in 2032 to 83 percent by 2040. Granted, legislation to address trust fund solvency would likely make changes more gradually, but the graph underscores the importance of addressing the big entitlement programs.
It is clear from CBPP's projections that there is still plenty of work to do on the debt. It remains at a high level as a percent of GDP by historical standards – in fact, a post-World War II record high – and will be on an upward path over the medium- and long-term under just about any scenario. Lawmakers have helped make the picture look better in recent years, but they're not nearly there yet.