Looking at the Long Term in 2015
CBO's Long-Term Budget Outlook, released yesterday, is a detailed 130-page document, filled with budget projections for the next 25 years, along with a supplemental spreadsheet with projections for the next 75 years. We've boiled down the document into a concise 6-page analysis with key facts and findings. CBO's debt projections have changed only slightly since last year – slightly higher debt in the next few years and a very modest decline in the still unsustainable upward track thereafter.
As we explain in our paper, CBO projects deficit and debt levels to remain fairly stable over the next few years, but then rise dramatically. Under CBO's "Extended Baseline Scenario," which generally reflects current law, deficits will rise from 2.7 percent of GDP over the next several years, to 3.8 percent by 2025, 5.9 percent by 2040, and 9.5 percent by 2090. As we explain, this will have major implications for debt:
The combination of deficit reduction legislation earlier this decade, low interest rates, and a slowdown in health care cost growth have certainly improved the long-term fiscal outlook, yet debt remains at record-high levels and is set to continue growing unsustainably with no end in sight. If policymakers continue to act irresponsibly – as they did with the “doc fix” legislation earlier this year – the situation will be far worse."
This rising debt is largely the result of increases in health and retirement spending, which are outpacing revenue growth. Health spending is projected to rise from 5.2 percent this year to 6.1 percent in 2025, 8.0 percent by 2040, 10.6 percent by 2065, and 13.3 percent by 2090. Social Security spending will also rise – though not as quickly or as high – from 4.9 percent of GDP today to 5.7 percent in 2025, 6.2 percent in 2040, 6.1 percent in 2065 and 6.5 percent in 2090. And because revenue will not rise fast enough to match this growth, interest costs will balloon.
Fiscal Projections under CBO's Long-Term Scenarios (% of GDP)
|Extended Baseline Scenario|
|Alternative Fiscal Scenario*|
*2065 and 2090 are rough CRFB extrapolations
CBO also publishes an Alternative Fiscal Scenario (AFS), which assumes policymakers will increase spending and reduce taxes compared to current law. This shows a much steeper climb in debt, which reaches 156 percent of GDP by 2040 and by our calculations 340 percent by 2065 and 600 percent by 2090.
Incorporating the negative economic impact of debt would further worsen the situation. CBO estimates that real GNP would be reduced by 3 percent in 2040 under the Extended Baseline and by another 5 percent beyond that under the AFS compared to a scenario where lawmakers kept debt under control.
The report explains the real economic consequences of failing to address the mounting debt, as well as the benefits of acting sooner rather than later. As we conclude in the paper:
Lawmakers should start by making sure not to worsen the current debt situation over the next few years, but that is clearly not enough to put debt on a sustainable path. Truly fixing our debt will require significant reforms to entitlement programs and the tax code to bring spending and revenue much more closely in line. The sooner they act, the smaller the changes will need to be and the more time it will give people to adjust to the new policies. Waiting will only make the choices more painful and limit budgetary flexibility as debt continues to grow."
See our paper for a more detailed discussion of these issues, including the drivers of long-term debt and deficit projections, CBO scenario assumptions, the exhaustion dates of Social Security and Medicare trust funds and the economic effects of growing debt and deficit reduction.
This blog is part of a series examining aspects of CBO's 2015 Long-Term Budget Outlook. Click here to read our 6-page summary of CBO's paper, or here for other blogs in the series