Last week, Congressional Budget Office (CBO) Director Douglas Elmendorf explained CBO’s projections on federal spending for the next decade, comparing it to past spending. The results are not good – not only are we going to spend more, but the analysis used is CBO’s optimistic projection on spending. More on that later.
For now, Elmendorf’s depressing data:
CBO projects that revenues will average about 19 percent of GDP during the coming decade under current law, above their 18 percent average of the past 40 years. CBO also projects that outlays will average 22 percent of GDP over the next 10 years under current law, above their 21 percent average of the past 40 years. Thus, both outlays and revenues are projected to be higher than their historical average shares of the economy’s total output.
In plain English, the federal government is expected to average both higher tax revenue and higher spending over the next decade as compared to the average over the last 40 years. Why will spending be higher? Elmendorf again, with emphasis added:
CBO expects that, under current law, outlays will be above their historical average primarily because the aging of the population, rising health care costs, and a significant expansion in eligibility for federal subsidies for health insurance will push up spending for Social Security and the major federal health care programs (Medicare, Medicaid, and the subsidies to be provided through insurance exchanges). Such spending is projected to equal 10.9 percent of GDP during the coming decade, compared with a 40-year average of 7.2 percent. In addition, with federal debt held by the public much larger relative to GDP than it has been in the past, net interest payments are projected to equal 2.5 percent of GDP, compared with a 40-year average of 2.2 percent.
Other broad categories of spending are expected to represent smaller shares of GDP than they have been in the past: Mandatory spending other than for Social Security and the major health care programs is projected to average 2.6 percent of GDP, compared with a 40-year average of 3.0 percent; defense spending is projected to average 3.0 percent of GDP, compared with a 40-year average of 4.7 percent; and nondefense discretionary spending is projected to average 3.0 percent of GDP, compared with a 40-year average of 4.0 percent.
In other words, the major growth in spending will be in Social Security, Medicare, Medicaid, Obamacare, and interest payments. Remember, though, our betters in Washington say we don’t have a spending problem right now. *Wink*
So, this is all pretty bad, though deficits are also expected to drop as compared to the economy, which is a relatively good thing. The problem is that at the end of the next decade is when interest payments, Social Security payments, and Medicare costs are expected to really skyrocket – meaning, any deficit reduction efforts in the next decade will be ineffective at preventing a long-term fiscal problem unless Social Security and Medicare are reformed, and other spending is cut.
Above, I referenced Elmendorf’s analysis was the upbeat estimate from CBO, aka current law, aka what’s on the book – what the law says Congress must do. However, the other analysis in CBO’s February report, known as current policy, aka what Congress tends to do when faced with politically unpopular policies about to take effect – what I call the “political reality” scenario – is much less optimistic. For example, the current policy projection shows $9 trillion will be added to the debt over the next decade, $1.5 trillion more than the current law estimate. This is because CBO expects Congress to avoid tax increases and spending cuts currently on the books.
The short version to all of this is simple: spending is going to go up, debt is going to go up, and the lion’s share is in Obamacare, Social Security, Medicare, Medicaid, and interest payments. If America wants to tackle its debt problems, these are the major places to look. Yes, defense spending should be cut. Yes, many other agencies should be cut or eliminated. But compared to the Big Five spending items, cutting elsewhere will amount to a Band-Aid on a gunshot wound.