CBO Testified on the Long-Term Budget Outlook

June 6, 2012

I testified this morning to the House Budget Committee about the Long-Term Budget Outlook that CBO released yesterday.

I explained that we had assessed that outlook under two very different assumptions about future policies for federal revenues and spending, and that the budgetary and economic outcomes under those two scenarios would be starkly different. I highlighted two specific implications of the long-term projections:

First, it is not possible both to keep taxes at their historical average share of gross domestic product (GDP) and to keep the laws unchanged for Social Security, Medicare, and Medicaid.

The reason we can’t repeat that historical combination of policies is that the aging of the population and rising costs for health care are making those large entitlement programs much more expensive than they used to be.

It is possible to keep taxes at their historical average share of GDP—but only by making substantial cuts relative to current law in the large entitlement programs that benefit a broad group of Americans at some point in their lives. Alternatively, it is possible to keep the laws for the large entitlement programs unchanged—but only by raising taxes substantially on a broad group of Americans.

Changes in other federal programs—besides the large entitlements—can affect the magnitude of the changes needed in taxes or that handful of large programs, but they cannot eliminate the basic tradeoff I’ve just described. Even if spending on all of those other programs—including national defense and a wide variety of domestic programs—fell to a smaller share of GDP than we’ve seen at any point since World War II, debt would still be on an unsustainable upward trajectory without substantial changes in taxes, the large entitlement programs, or both.

Second, keeping federal deficits and debt no larger than what we project under current law would involve difficult policy trade-offs.

Under current law, as captured by the extended baseline scenario, we expect that debt will decline slowly relative to GDP in 2015 and beyond—but so slowly that, even 25 years from now, it will still be larger relative to GDP than in any year between 1956 and 2008. Such a path for federal debt would, gradually, reduce the crowding-out of private investment caused by high debt, restore policymakers’ ability to use tax and spending policies to respond to unexpected domestic or international challenges, and reduce the risk of a sudden fiscal crisis during which investors would lose confidence in the government’s ability to manage its budget and the government would lose its ability to borrow at affordable rates. That path for federal debt might not be optimal—analysts don’t know what amount of debt is optimal—but it is one path that might be considered a plausible goal for federal policy.

Attaining that objective would pose significant policy trade-offs, though—trade-offs that are exemplified by the decisions confronting the Congress as various provisions of law expire or take effect at the end of this year. If the Congress wanted to keep the nation on that current-law path of declining debt, any actions that would significantly worsen the budget outlook relative to current law would need to be offset, or “paid for,” by other actions that would improve the budget outlook by comparable amounts. For example, removing the automatic spending reductions under the Budget Control Act would raise deficits by about $1 trillion over the next decade, and extending all of the 2001 and 2003 tax cuts and indexing the AMT for inflation would raise deficits by about $4.6 trillion over the next decade (both of those figures exclude additional debt service costs). Making such changes to current law, while maintaining the same path of declining debt as under current law, would require other changes in policy that would reduce deficits by roughly $1 trillion or $4.6 trillion, respectively.

To be sure, the Congress might not enact those changes in law, or it might choose to allow more debt than would occur under current law or to reduce debt more quickly relative to GDP than would occur under current law. There are many possible combinations of policies that Congress might pursue depending on its policy goals, and CBO will make neither recommendations nor predictions about them. The point is simply that the path of debt under current law would still leave debt at a historically high level relative to GDP, and even achieving that path would require very large changes in current policies.