Long term budget outlook redux

June 17, 2008

I delivered testimony today before the Senate Finance Committee on CBO's long-term budget outlook and options for slowing the growth of health care costs. Under any plausible scenario, the federal budget is on an unsustainable paththat is, federal debt will grow much faster than the economy over the long run. In particular, 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 gross domestic product (GDP) remain at their current level, that rise in spending will eventually cause future budget deficits to become unsustainable. To prevent deficits from growing to levels that could impose substantial costs on the economy, revenues must rise as a share of GDP, or projected spending must fallor some combination of the two outcomes must be achieved. Future growth in spending per beneficiary for Medicare and Medicaidthe federal governments major health care programswill be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costswhich will be difficult, in part because of the complexity of health policy choicesis ultimately the nations central long-term challenge in setting federal fiscal policy. Our political system unfortunately does not appear to be particularly effective at addressing gradual long-term problems such as rising health care costs and aging. The problems caused by rising health care costs, though, are not just long-term ones. Indeed, health care costs are already reducing workers take-home pay to a degree that is both underappreciated and at least partially unnecessary, consuming roughly a quarter of the federal budget, and putting substantial pressure on state budgets (mostly through the Medicaid program), thereby constraining funding for other governmental priorities. Identifying and addressing inefficiencies in the nations health care system can yield significant benefits, even in the short term, and focusing attention on those effects that are already occurring may be helpful in developing the consensus necessary to make the needed changes.