Budget

9 Takeaways From the CBO's New Budget Report

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The new Congressional Budget Office report on the federal budget outlook is all about the long-term debt. We're coming out of a period of extremely high annual deficits and entering a period of relatively smaller deficits (although smaller in this case still means about $670 billion for the year) and federal debt levels that decline slightly relative to the size of the economy.

But it's the calm before the storm. Over the next 25 years, CBO projects an exploding federal debt—and an array of negative impacts to the economy as a result.

1. Over the next few years, debt levels are expected to be stable—and even decline slightly. Today's federal debt is equal to 73 percent of gross domestic product (GDP). That's expected to drop to 68 percent of GDP by 2018. But that's still historically high, and a huge increase from just a few years ago: Debt was just 39 percent of GDP in 2008, about where it's been, on average, for forty years. And even these slightly lower debt levels won't last for long.

2. The long-term federal debt trajectory is unsustainable. In 2038, the CBO expects that debt will hit 100 percent of GDP. And it wouldn't stop growing there. At that point, the CBO says, "debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely." Indeed, CBO says, it's unsustainable even before you factor in the extra problems that a heavy and growing debt burden is likely to cause.

3. The biggest factor is the growth of entitlement spending. The price tag for America's major health care programs and Social Security obligations will double as a percentage of GDP—hitting 14 percent in 2038, which the report notes is twice the 7 percent average of the last four decades.

4. The other big projected growth area for the federal budget is debt service. For the last 40 years, the federal government has spent about 2 percent of GDP paying for our debt. But that's on track to rise to 5 percent of the economy—mainly, CBO says, because we'll be carrying a much larger debt load than we have in the past.

5. Spending on governmental functions aside from entitlements and debt service is set to decline as a percentage of the economy. The non-entitlement, non-debt portion of the budget has averaged about 11 percent of GDP over the last four decades. But it's on track to decline to just 7 percent of the economy.  

6. The coming rise in debt won't be driven by low taxes. For the last few years, we've seen folks argue that the nation's unusually high deficits are merely a product of extraordinarily low federal tax revenues. But going forward, that won't be the case. By 2038, the CBO projects that tax revenues will equal about 19.5 percent of GDP. The post-war average is about 17.5 percent. So the rise in debt is set to occur even with a noticeably higher portion of the economy flowing into federal coffers.

7. Rising debt will probably coincide with rising interest rates—which means that borrowing and carrying debt will cost us even more. The CBO says it "expects interest rates to rebound in coming years from their current unusually low levels, sharply raising the government's cost of borrowing."

8. Higher debt levels will have multiple negative effects on the budget and economy.  Higher national debt will result in decreased private investment, higher federal interest payments that exacerbate the core problem and make policy responses even more difficult, less flexibility for the government to respond to emergencies, and even the risk of an economy-destablizing fiscal crisis.

9. The policy responses to mitigate rising debt levels are all politically difficult. Federal policymakers will have to cut spending, increase revenues, or some mix of the two. But it will be especially hard to raise revenues since they're already on track to be higher as a percentage of GDP than is typical. Rapid changes might negatively shock the system. But letting debt continue to rise is dangerous too: "because federal debt is already unusually high relative to GDP," the report says, "further increases in debt could be especially harmful."

As always, the CBO cautions that its projections are inherently uncertain—and more uncertain the further it projects into the future.

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  1. In other breaking news, the sun is hot.

    1. And squirrels are squirrels

  2. In other breaking news, the sun is hot.

    1. And squirrels are squirrels

  3. http://cnsnews.com/news/articl…..still-755b

    That link above should be plastered all over the place. In a year when the economy was horrible and the employment situation worse, the feds collected a record amount of taxes. This should be pointed out every time some Beltway asshole claims our problem is low taxes not high spending.

  4. “a trend that could not be sustained indefinitely.”

    No shit. Give us the numbers, you so smart!

  5. Over the next few years, debt levels are expected to be stable?and even decline slightly.

    Anybody care to make a small wager that FY 2014 deficit will exceed FY 2013? Anybody?

    1. The deficit has been going down a bit in recent years. It is not as high today as it was in 2010. With a divided government and an increasingly militant House and also the total failure of the scare tactics used against sequester, I would take that bet. It will still be too large. But it is a good bet it will be smaller.

      1. The deficit or the debt?

        The deficit (the annual shortfall between income for the year and the outlays) may be going down, but the debt (the amount borrowed to cover all those annual shortfalls present and past) will keep growing.

        It doesn’t matter much if I slow the rate of descent from 10,000 fpm to 8,000 fpm, the impact with the terrain will still kill me.

        1. The RATE the debt increases relative to GDP is the important number. If we consistently add year after year $100 to a debt but our GDP grows, then debt relative to GDP is shrinking which is not ideal but good enough (if we had a balanced budget, the rate will be decreasing, too… just faster).

          Of course, none of these numbers take into account the Fed’s actions over the past four years, which is actually the scarier metric.

        2. I believe they are talking about the Debt to GDP ratio.

          Basically they are projecting that GDP will grow faster than the debt.

          Of course this ignores 2 facts.

          1) one of the components of GDP growth is inflation (the other 2 being population growth and productivity gains). Since inflation does not result in any new wealth with which to pay off that debt the proper comparison would be debt to inflation adjusted GDP, otherwise they are just assuming a partial default on the debt is baked into the equation.

          2) Quite a bit of the US’s debt is factored off the books and not reflected in the official number, some of that does show up in the projections of future spending (Medicare & Social Security) but some does not (Loan Guarantees, Fannie/Freddie, FDIC, etc.) meaning that the situation is always worse than the CBO makes it seem.

          1. I’m pretty sure the CBO uses inflation adjusted figures for computing all of this.

            1. Maybe so, but the “official” inflation rate is (deliberately and dishonestly) lower than the real rate, so their figures still make the situation look better (well, less bad) than it really is.

          2. Basically they are projecting that GDP will grow faster than the debt.

            That jumped out at me. I cbf to read the report right now, but I’d be curious to see what kind of growth rates they are projecting now through 2018 such that the debt as a percentage of GDP will shrink to 68% from 73%. My guess based on typical government projections is that in this scenario unemployment is 3.5% and GDP is growth is in the double digits

          3. Also can’t be bothered to read the report, but are they really projecting that interest rates will remain at the rock-bottom levels they are now, and that we’ll take in nearly 20 percent of GDP in taxes? Have we ever taken in 20 percent?

          4. No, inflation is your friend if you’re a heavily indebted government. You get to pay back the debt with inflated dollars which are much easier to come by. It’s called “monetizing” the debt. There’s just one problem and that is that our entitlement spending is either statutorially tied to the rate of inflation (SS) or de facto tied to it (Medicare) which means that even inflation doesn’t help.

          5. Quite a bit of the US’s debt is factored off the books…

            Pension fund & health care liabilities for Civil servants come to mind.

      2. The deficit or the debt?

        The deficit (the annual shortfall between income for the year and the outlays) may be going down, but the debt (the amount borrowed to cover all those annual shortfalls present and past) will keep growing.

        It doesn’t matter much if I slow the rate of descent from 10,000 fpm to 8,000 fpm, the impact with the terrain will still kill me.

  6. What is the CBO’s projection on the alt-text deficit?

  7. Over the next few years, debt levels are expected to be stable?and even decline slightly.

    SEE! IT’S WORKING!!

    /Obama Administration

    1. I’ve halved the deficit since I came into office – President Obama.

      Conveniently ignoring the fact that his base line is his first year in office, in which almost all of the fiscal crisis emergency funds kicked in and gave us the biggest deficit we’ve seen since WW2.

  8. Not sure how defense is not mentioned considering its such a huge outlay…listen, both sides must agree to across the board decreases including defense…not sure who is going to tell my mom that her ssn payment will be less and she will have to pony up more for medical though..

    Also, how about addressing the major issue, trying to compete in a global market that is not a level playing field…

    1. “trying to compete in a global market that is not a level playing field”
      ——
      Uh, I think USA hurts itself more in this area than all of the protective policies other countries can ever hope to institute.

      The crap the NSA has been doing, for example, is estimated to cost US software businesses tens of billions in sales and lead foreign governments to seed invest competitors more heavily.

      Of course, it’s the US software businesses’ own damned fault for agreeing to PRISM while doing their best to pretend they were a submissive French bulldogs, but still…

    2. “Not sure how defense is not mentioned considering its such a huge outlay…listen, both sides must agree to across the board decreases including defense…”
      I don’t see anyone here arguing to keep or increase the defense budget, but it is ~18% of the total. You could cut it to zero and it wouldn’t cover the deficit.
      http://www.bing.com/images/sea…..edIndex=21

      “Also, how about addressing the major issue, trying to compete in a global market that is not a level playing field…”
      Nothing we can or should do about that, other than cut our tariffs. Doesn’t take a lot of research before it’s obvious that tariffs only hurt the country imposing them.
      http://www.freerepublic.com/fo…..4295/posts

  9. As a country, we have been through our phase of factories burning down and killing hundreds of people…unfortunatly, the countries we compete agaist have not and they are so awash in corruption they can’t hope to escape…

    1. Yes, clearly the problem in China, Vietnam, Bangladesh, Haiti, etc etc is lack of regulation. “TEH PRICE WE PAY FOR CIVILIZASHUNZ!! DO YOU WANT TEH CHILDRUNZ TO STARVE!!”

  10. Has the CBO included that the jobs being created are lower wage, part time, etc. which will translate to lower revenue streams?

  11. Can someone help me out here? How is our debt ratio only 73%. Debt= $17trillion. GDP = $15.6trillion. That’s a 109% ratio, no. Someone breakout an abacus and help me out!

    1. Debt held by the public is $12trillion. Intragovernmental holdings is another $5 trillion. Debt ratio is based on external debt.

      1. Hey thanks, so is intragovernment debt things like the Soc Sec ‘trust fund’?

    2. Same way Clinton “balanced” the budget. Pay down public debt with money borrowed from future payouts due from Social Security and other various public employee pension funds.

  12. In a transparent government, we could get things done that would actually SOLVE the debt crisis.

    Social Security, Medicare, and Medicaid are the biggest factors in our deficit. I have a simple, albeit painful plan to fix this that will hopefully make everyone happy.

    1) Cut the programs. Easy. Except for the people currently enrolled in SS. The people who are currently collecting Social security will be allowed to keep it until they would ordinarily cease to qualify for it.

    2)Open state borders for insurance purchases. That will allow for far better free market pricing and availability.

    3) Cut the taxes. Easy. Stop collecting for these programs. Allow people to keep the money they earn, rather than directly stealing it.

    4) Finance SS on the back of the government, until the final payment is made.

    5) Use the additional revenue from the increased productivity of the free market to pay off the debt incurred during the paydown period of SS.

    Of course, it would help IMMENSELY if they would cut the spending in other places as well. Like, I dunno, everything? Do away with the Department of Energy, Education, Transportation, Homeland Security, Defense, Agriculture, Health and Human Services, Commerce, Housing and Urban Development, Interior, Labor, State, Treasury, Veterans Affairs, FCC, FDA, DEA, ATF, FBI, NSA, Etc.

    Oh, and remove the FED. That’d do wonders.

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