CBO lays bare Washington’s financial mess
Washington’s fiscal outlook is depressing. The authoritative Congressional Budget Office (CBO) predicts that in the years to come, federal spending will continue to greatly exceed revenues. Historically large annual deficits will add to the country’s already heavy accumulation of public debt, so that by 2032, the stock of public debt held by the public will reach 110% of gross domestic product (GDP) of the country and then increase further to reach 185% by mid-2020. century, far higher than most at any time in history, including World War II. The growth of rights is at the root of the problem.
Here’s a rundown of what the CBO reveals about Washington’s finances. Its economists project that federal revenues from all sources will grow roughly in step with the economy, taking a hit of more than 18% of GDP on average each year, close to historical precedent. The expense side of the ledger is less stable. The CBO projects that federal spending will grow from about 23.8% of the economy this year to about 25.8% by the mid-2030s, then climb further to about 28.9% by the mid-2030s. of the century, an increase of 5.1 percentage points.
It is the growth in entitlements – Social Security, Medicare, Medicaid and other such programs – that is causing the relative increase in spending and fiscal problems in general. According to the CBO, these spending lines will grow from around 10.8% of GDP this year to 13.7% by the mid-2030s and 14.9% by mid-century. This 4.1 percentage point increase in the relative size of rights expenditures represents more than four-fifths of the relative increase in all expenditures. The rest of the overall increase stems from Washington’s need to pay interest on increased debt, itself the result of past increases in duty spending.
The CBO forecast differs little from previous ones. For decades, federal spending has grown as part of the economy almost entirely due to relative increases in entitlement spending. Between 1970 and this year, overall federal spending has risen from 18.7% of the nation’s GDP to 23.8% according to the CBO’s estimate for 2022. This increase has occurred even as relative levels of government spending defense have fallen from 7.8% of GDP in 1970 to around 3.5% today. It was the increase in duty spending that all but wiped out the potential budget relief offered by lower Pentagon demands. Duties have fallen from 7.6% of GDP in 1970 to 10.8% today.
Although the CBO has essentially extrapolated historical trends into the future, the picture it paints may be overly optimistic. It assumes, for example, that defense spending will remain roughly stable at around 3.5% of GDP. It might seem prudent to remove from the outlook the past fiscal relief offered by relative declines in defense spending, except that growing geopolitical pressures seem likely to increase the relative size of defense spending. Even on rights, there are signs of fiscal optimism. Although the CBO’s projections slightly increase the historic rate of fee increases, there is still more spending to look for. Just three considerations offer perspective.
The government has already decided to maintain the subsidies under the Affordable Care Act, even if they were to expire. These will accumulate over time to increase the share of the budget and of the GDP absorbed by the rights. President Biden plans to cancel student debt. The exact amounts will, of course, depend on how much the government decides to forgive and what income criteria it imposes on recipients, but it certainly indicates an increase, not a moderation in the relative burden of entitlements on the economy, d especially since it will set a precedent for future generations of indebted college students.
Even more important is the likely impact of the country’s aging population. With the continued retirement of the huge baby boom generation, the number of dependent retirees will continue to grow. In 1970, for example, some 10% of the population was 65 or older. By 2019, that figure had risen to 16%. The Census Bureau estimates that by the mid-2030s, this figure will rise to 21% and to 22 by mid-century. This huge proportion of older people can only increase demands for Social Security and Medicare and other federal services, greatly accelerating the relative growth in entitlement spending. CBO estimates attempt to account for this trend, but perhaps not enough.
None of this is to say that the duties, already at about two-thirds or more of the federal budget, are the wrong way for Washington to spend. The trends, historical and forward-looking, reflect priorities voted on by Congresses of both parties and enacted by Democratic and Republican presidents. Perhaps this is how the nation should allocate its production of goods and services. It is a political judgment.
Economics can only point out that these decisions have condemned federal finances to ever-increasing deficits and debt burdens and will continue to do so until Washington takes one of three admittedly difficult: 1) obtains control of rights, at least enough to moderate their rapid growth rate; 2) meets the ever-increasing demand for rights by sacrificing other government services, as has been done with defense in the past, but in today’s geopolitics this no longer seems possible; 3) tells voters they need to pay more taxes so their representatives don’t have to make those tough decisions. As the CBO has made clear, albeit indirectly, these are the only ways to avoid a debt burden that many already describe as unbearable.