The long-term budget outlook has improved dramatically over the last three years
Yesterday, the Congressional Budget Office (CBO) released its annual Long Term Budget Outlook (LTBO), which projects federal spending, revenues, deficits, and debt over the next 75 years. There are many points of controversy with regards to the LTBO, not the least of which is that it’s pretty ridiculous for CBO to pretend it knows what health care costs will look like in 2087. Personally, I think that CBO’s LTBO provides a lot more heat than light, and I would be the first to applaud if CBO decided to only release ten-year budget projections (in themselves subject to a huge margin of error).
Nevertheless, there is still value in looking at the change in projections from one year to the next. The figure below clearly shows that over the past three years CBO’s extended current law budget projections—which assumes no changes are made to the law—have improved drastically.
2009: CBO projected that debt held by the public would rise from around 60 percent of GDP to just over 300 percent of GDP in 75 years.
2010: CBO markedly improves its 75-year outlook, which now shows debt rising to just over 110 percent of GDP. This improvement largely reflected passage of the Affordable Care Act (ACA), which prioritized reducing long-run deficits and slowing the rate health of care cost growth (the predominant driver of long-run deficits).
2011: CBO again improves its outlook, now projecting debt rising to 87 percent of GDP in the first 30 years but then actually falling to 75 percent over the next 45 years. This improvement was largely due to three changes in CBO’s assumptions and projections: (1) lower costs for the new ACA health insurance exchange subsidies; (2) higher taxable wages due to the employer-sponsored health insurance excise tax (pushing worker compensation away from the tax-free health coverage); and (3) a slightly higher long-run economic growth rate.
The ultimate goal of budget reform is to reach “fiscal sustainability,” a point at which public debt is growing no faster than the economy (stabilizing debt relative to national income, i.e., ability to pay). According to 2011 LTBO projections, the federal government had already achieved long-run “fiscal sustainability.”
2012: For the third straight year in a row, CBO favorably revises its long-run budget outlook: Starting in 2014, public debt is projected to fall by 0-3 percentage points each year. The public debt is shown to be fully paid down by 2070, and within 75 years the federal government is projected to have accrued reserve surpluses equal to about a third of the economy.
This improvement is primarily due to two factors. First, the Budget Control Act (the result of last summer’s debt ceiling crisis) cuts spending by over $2.1 trillion through 2021, and because of the way CBO indexes discretionary spending for inflation in its projections, it continues to reduce deficits in subsequent years. And second, CBO changed the way it projects health care cost growth. In the past, it used the average growth rate over the last 25 years, but in this report it calculated a weighted 25-year average that puts more weight on recent years. This new methodology does a better job of taking into account the fact that health care costs have been slowing recently, possibly evidence that the ACA has exceeded expectations.
Budget wonks will rightly point out that the projections in question are CBO’s extended baseline, which assumes no changes to current law. This means that the Bush-era tax cuts expire next year, the sequestration cuts also go into full effect next year, the Alternative Minimum Tax will apply to more upper middle-income households, and Medicare reimbursements to doctors will be allowed to fall dramatically. But with the exception of the sequestration trigger, all those other factors were also present when CBO made their projections in 2009, 2010, and 2011. The fact is the fiscal outlook of the federal government has improved dramatically in the last three years.
More importantly, this report clearly shows that the path toward fiscal sustainability includes allowing some—if not all—of the Bush-era tax cuts to expire and fully implementing and protecting the Affordable Care Act.