Long-term budget outlook

December 13, 2007

This morning, CBO released its new long-term budget outlook and I am testifying before the House Budget Committee on our report. The report presents 75-year projections of federal spending and revenues under two alternative sets of assumptions, each of which represents a possible interpretation of current fiscal policy. Given the reputation of economics as the "dismal science" (which itself originated in part from flawed long-term predictions...), it is important to recognize that the budget outlook presents the implications of current fiscal policy -- and does not represent a prediction of the future that policymakers are powerless to affect. The adverse consequences of the nation's current long-term fiscal trajectory are serious, but they can be addressed through changes in spending and revenue policies. (In addition, any projections that go out far into the future are subject to vast economic and technical uncertainty. Nevertheless, the implications of these projections are clear and daunting.) The outlook makes several key points:

  • Under any plausible scenario, the federal budget is on an unsustainable path over the long term. In the absence of significant changes in policy, rising costs for health care and the aging of the U.S. population will cause federal spending to grow rapidly. If federal revenues as a share of GDP remain at their current level, that rise in spending will eventually cause government debt to increase to unprecedented and implausible levels.
  • The rate at which health care costs grow relative to national incomerather than the aging of the populationwill be the most important determinant of future federal spending. The Congressional Budget Office (CBO) projects that under current law, federal spending on Medicare and Medicaid measured as a percentage of GDP will rise from 4 percent today to 12 percent in 2050 and 20 percent around 2080.
  • The aging of the population, though not the primary factor driving higher government spending in the future, will nonetheless exacerbate fiscal pressures. For example, future growth in spending on Social Security will largely reflect demographic changes; CBO projects that such spending will increase from about 4 percent of GDP today to 6 percent in 30 years and then will roughly stabilize at that rate thereafter.
  • Substantial budget deficits would reduce national saving, which would lead to an increase in borrowing from abroad and lower levels of domestic investment that in turn would constrain future income growth.

More specifically, CBO examines two scenarios. (In its previous long-term budget outlook, CBO analyzed six scenarios, but many observers viewed the multiplicity of scenarios as too confusing. So this report focuses on two.)

  • The extended-baseline scenario adheres closely to current law, following CBOs 10-year baseline budget projections from 2008 to 2017 and then extending the baseline concept in its projections for the rest of the years in the period, to 2082.
  • The alternative fiscal scenario represents one interpretation of what it would mean to continue todays underlying fiscal policy. It incorporates some changes in policy that many observers believe likely to occur and that policymakers have regularly made in the past (such as adjusting provisions of the AMT).

A useful metric for the size of the adjustments in either spending or revenues required to avoid unsustainable increases in government debt is provided by the so-called "fiscal gap." The gap measures the immediate and permanent change in spending or revenues necessary to avoid a rise in debt as a share of GDP over a given period.

  • Under the extended-baseline scenario, the fiscal gap would amount to 0.6 percent of GDP through 2050 and 1.7 percent of GDP through 2082.
  • Under the alternative fiscal scenario, the fiscal gaps would be much larger, amounting to 5.2 percent of GDP through 2050 and 6.9 percent through 2082. (Only about 20 to 30 percent of that long-term fiscal gap through 2082 is attributable to the direct and pure effect of an aging population.)

The report was put together mostly by our Long Term Modeling Group (LTMG) within the Health and Human Resources Division at CBO. Joyce Manchester, who had been a senior official at the Social Security Administration, recently joined CBO and assumed leadership of this group. Many outstanding analysts within LTMG and elsewhere in CBO contributed to the report -- Noah Meyerson, Julie Topoleski, Douglas Hamilton, Michael Simpson, Sven Sinclair, Ralph Smith, Lyle Nelson, Sam Papenfuss, and David Weiner all played key roles in writing the report, and many others worked on the simulations contained in it. A report of this size and complexity also involves a substantial editing challenge. We have an exceptional editing team, which is led by John Skeen; Christine Bogusz and Leah Mazade worked on editing this report. The editors often have to struggle not only with tight deadlines but also the need to help us translate complex economic and budget concepts into what we hope becomes clear writing. And then there's catching those inevitable typos!