CBO Warns Unchecked Entitlement Spending Is ‘Unsustainable’

The Fiscal Times
Can the U.S. Boom While the World Busts?
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Can the U.S. Boom While the World Busts?

Here’s more bad news for President Obama: The non-partisan Congressional Budget Office warned Tuesday in its annual budget outlook that unchecked spending on Medicare, Social Security and other entitlement programs is “unsustainable” and will eventually drive the federally held debt to historic levels – and threaten the economy.

While the administration last week celebrated an improving economy and steadily declining budget deficit, the new CBO report says the long-term debt could reach the equivalent of 100 percent of the overall economy within 25 years. Publicly held debt, by contrast, currently equals about 74 percent of the Gross Domestic Product.

Related: White House Touts Continued Decline in the Deficit

At the same time, most other government programs and services – so-called discretionary spending that is essential to the smooth operation of government – would be severely squeezed.

After several more years of declining deficits and overall debt, budget deficits will begin to rise again. “Debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely,” says the CBO’s 2014 Long-Term Budget Outlook.

Funding for Social Security and the government’s major health care programs will spike as the population ages and health care programs are expanded to a total of 14 percent of GDP by 2039. That’s double the 7 percent that has been the case over the past 40 years. By comparison, total spending on everything other than interest on the federal debt would drop to 7 percent of GDP by 2039 – or “well below the 11 percent average of the past 40 years, and a smaller share of the economy that at any time since the late 1930s.”

Related: Will a Two-Year Budget End Fiscal Fights?

“Unless substantial changes are made to the major health care programs and Social Security, spending for those programs will equal a much larger percentage of GDP in the future than it has in the past,” the report concluded. “At the same time, under current law, spending for all other federal benefits and services would be on track to make up a smaller percentage of GDP by 2024 than at any point in more than 70 years.”

In addition, federal revenues would grow substantially under current law as a percentage of the overall economy – at a faster rate than any time in memory. Revenues would equal 19.5 percent of GDP by 2039, compared to an average of 17.5 percent over the past four decades, the report stated.

Even so, the report said, spending would soon begin to outpace revenues by increasing amounts relative to GDP and in turn generate higher budget deficits.

“Federal debt held by the public is projected to grow faster than the economy starting a few years from now, and because debt is already unusually high relative to GDP, further increases could be especially harmful,” the report stated.

Related: Democrats Try to Ride Ryan’s Budget to Victory

The latest from CBO – which echoes the warnings of a number of conservative groups and government watchdogs – is definitely not what many in Congress or at liberal think tanks wanted to hear. The combination of an economic comeback, surging tax revenues and spending restraints imposed by lawmakers and the White House in recent years have resulted in a sharp decline in the deficit.

Congress last December agreed to a two-year budget deal that removed from the table any serious discussion of entitlement and tax reform until well after the November elections. Liberal groups maintain that the deficit has been tamed and won’t be a problem for years. They insist government should worry more about investing in jobs and economic growth than scaling back Social Security and other entitlement programs.

However, the CBO spelled out a series of adverse effects of allowing the debt to soar in the long term. Among them:

“The large amount of federal borrowing would draw money away from private investment in productive capital in the long term, because the portion of people’s savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income than would otherwise be the case, all else being equal,” the report said.   

Federal spending on interest payments would rise, “requiring higher taxes, lower spending for benefits and services, or both to achieve any chosen targets for budget deficits and debt.

House Budget Committee Chairman Paul Ryan (R-WI) weighed in on the report, saying in part, “The status quo isn’t working, and families are paying the price. We need to expand opportunity for everyone in this country, and we can start by getting federal spending and debt under control. That’s how we can make the federal government more accountable and more effective.”

Rep. Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee, said, “The fastest and most effective way to reduce our deficit is to put Americans back to work.  We’ve made progress on this critical issue, with 288,000 jobs added to the economy in June and 52 consecutive months of private sector job growth, but we must do more.”

He added, “That is why investing in our national infrastructure, raising the minimum wage, and passing comprehensive immigration reform are so important to creating good-paying jobs for hardworking Americans.”

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