Would the President's Submission Actually Stabilize Debt?
Last week, in our analysis of the President's submission, we noted how the President's submission to the Super Committee nearly stabilizes debt, but not fully, this decade and how much more will be needed to actually put debt on a clear downward path.
We stated that:
"Measured against CBO assumptions, the President’s submission would nearly, but not quite, stabilize the debt as a share of the economy. Under the submission, debt would rise substantially through 2014 – from 67 percent of GDP today to 77 percent by 2014. Between 2014 and 2019, it would decline below 74 percent; however it would rise slightly between 2019 and 2021."
Apparently, CBPP thinks we went a bit too far in our analysis and in recent statements in criticizing the President's submission for not stabilizing the debt. James Horney argues that there are only a couple tenths of a percentage point increases in debt as a share of the economy later in the decade, something that "no economist would say...represents an unsustainable budget."
So let's explain our position a bit further.
The problem is that the debt needs to be stabilized so that it is not growing faster than the economy, and is on a downward path. While the president's submission almost stabilizes the debt this decade, it would then rise as a share of the economy thereafter. The President's plan doesn't go nearly far enough in addressing the drivers of debt, notably health care and retirement costs. Though the plan makes some notable improvements to health care cost-controls this decade and beyond, including Medicare premium and cost-sharing reforms and the strengthening of IPAB, they likely would not be sufficient to control costs over the long-term. In addition, the plan completely ignores Social Security reform when the costs of an aging population will greatly add to the program's costs, further adding to our borrowing needs. The result is then unfortunately that would it would grow, rather than shrink as a share of the economy in future decades, which is a critical test for at least the minimum for fiscal sustainability.
Uncertainty of Projections
It is true that budget and economic projections are highly unpredictable, given fluctuations in the economy and the need to respond to emergencies. CBPP uses this point to argue that 0.1 and 0.3 percent of GDP increases in debt in 2020 and 2021, respectively, are essentially the same level. But the projections don’t take into account the recent worsening economy, before all the market turmoil and economic reports of a slowing recovery this summer. CBO stated that a quick review of the developments pointed toward a "somewhat weaker outlook for the economy in the near-term."
In addition, many other private forecasters, including the IMF, have also revised the economic outlook downward, which can have serious effects on the budget outlook. Even slightly lower growth could put debt as a share of the economy from a stabilized to an upward path as automatic spending rises, revenues shrink, and output grows more slowly. In addition to economic uncertainty, there is always the political uncertainties that policymakers could do less than what's needed to at least stabilize the debt and could go back on previously enacted debt reduction due to political pressures.
Thus, we should be shooting for a clear, downward debt path that leaves less up to chance.
Nearly Stabilized at Too High of a Level
Even if the President's submission were to fully stabilize debt, it would do so at too high a level. Debt stabilized above 70 percent provides too little fiscal space to respond to emergencies that could pop up this decade, whether internal or external, and leaves too little budget flexibility for the next generation.
To have the best chance of actually stabilizing the debt, a plan must put debt on a downward path to account for the risk of conditions worsening and to leave room for other policies. This is particularly true if the debt is being stabilized at a level well above 60 percent.
There are elements of the President's submission that warrant critiquing and other parts that deserve to be praised. It is very encouraging that the President has embraced the need to stabilize the debt and exceed the Super Committee's current mandate, but unfortunately we believe the President's submission would not be enough to stabilize and control debt. Hopefully, the Super Committee will take a hard look at some of the proposals put forward by the President. Ultimately, the members of the Committee will have to go much further to actually stabilize and reduce debt as a share of the economy.