Today I testified about the budget and economic outlook before the House Budget Committee and gave the following opening remarks. That outlook is illustrated in two updated slide decks released today: The Budget Outlook for 2016 to 2026 in 19 Slides, and The Economic Outlook for 2016 to 2026 in 17 Slides.
Key Elements of CBO’s Economic Forecast for the Next Decade
We anticipate that the economy will expand by 2.7 percent this calendar year and by 2.5 percent in 2017. Consumer spending is expected to provide the largest contribution to that growth. However, the anticipated pickup in growth above last year’s 1.8 percent rate stems largely from investment in business capital and in housing. Because of the projected growth, we expect slack in the economy to diminish over the next few years—lowering the unemployment rate to just under 4½ percent, pushing up compensation, and encouraging greater labor force participation. That reduction in slack will also push up inflation and interest rates.
Over the years following 2017, we project output to grow at a more modest pace, constrained by relatively slow growth in the nation’s supply of labor. Nevertheless, in those later years, that pace of growth is expected to be greater than it has been during the past decade.
Key Findings About the Budget Outlook
In fiscal year 2016, the federal budget deficit will increase, in relation to the size of the economy, for the first time since 2009. If current laws generally remained unchanged, the deficit would continue to grow, and debt held by the public would rise to $24 trillion (or 86 percent of GDP) by 2026, up from 74 percent of GDP at the end of 2015. Moreover, it would be on an upward trajectory: 30 years from now, debt would reach 155 percent of GDP, a higher percentage than any previously recorded in the United States. Such high and rising debt could have serious negative consequences for the budget and the nation, including an increased risk of a fiscal crisis.
Why Growth in Revenues Is Outpaced by Growth in Spending
In the coming decade, revenues would remain relatively stable in relation to the size of the economy, reflecting changes that roughly offset each other—increases in individual income taxes and decreases in corporate income taxes, payroll taxes, and remittances from the Federal Reserve. But we project outlays to grow, under current law, from about 21 percent of GDP this year to 23 percent of GDP in 2026. Almost half of the projected $2.5 trillion increase in total outlays from 2016 to 2026 is for Social Security and Medicare, in large part because the number of people who are at least 65 years old is estimated to increase by more than one-third over that period. Also, because of rising interest rates and growing federal debt held by the public, the government’s interest payments on that debt are projected to rise sharply over the next 10 years—more than doubling as a percentage of GDP. (In contrast, by 2026, spending subject to annual appropriations is projected to drop to its lowest share of GDP in the past 50 years. That occurs because most discretionary funding is capped through 2021 at amounts that increase more slowly than the projected growth of the economy.)
Projections for Medicaid and for Health Insurance Purchased Through Exchanges
I am often asked specifically about our projections for Medicaid and federal subsidies for health insurance purchased through exchanges. Medicaid spending is expected to increase by about 9 percent in 2016 after having grown about 15 percent a year in the previous two years. We expect that slowdown because the optional expansion of coverage authorized by the Affordable Care Act will have been in place for two years, and the rapid growth in enrollment that occurred during the initial stage of the expansion will have begun to moderate.
As for exchange subsidies, we and the staff of the Joint Committee on Taxation estimate that about 11 million people per month will receive them, on average, during calendar year 2016, up from an average of 8 million per month in 2015. That number is smaller than the average of 15 million recipients per month that we estimated a year ago for 2016. Overall, including people who do not receive subsidies for their insurance, we expect that 13 million people per month, on average, will have insurance purchased through the exchanges in 2016. That number is smaller than the average of 21 million people per month that we estimated a year ago for 2016.
Our projections of exchange enrollment for the years after 2016 have not been updated since March 2015. Because of the complexity of the analysis involved, we and JCT generally produce one major update per year to those 10-year projections. We will publish the next update in March, to accompany our next baseline.
How CBO’s Projections Have Changed Since August 2015
The 2016 deficit that we currently project is $130 billion higher than we last estimated—largely because the Consolidated Appropriations Act, 2016, retroactively extended a number of provisions that reduce taxes. For the 2016–2025 period, we now project a cumulative deficit that is $1.5 trillion larger than the $7.0 trillion that we projected six months ago. About half of that increase stems from the effects of laws enacted since August—especially the extension of tax provisions that reduce corporate and individual income taxes. About 30 percent of the increase is caused by changes in the economic forecast—chiefly slower growth in economic output over the 10-year period, which lowers revenues in our projections more than it lowers spending. The remainder of the increase is primarily in our estimates of outlays. Over the next decade, projected spending for Medicaid and veterans’ benefits is higher, and that increase is only partially offset by lower spending than we previously projected for Social Security.
Keith Hall is CBO’s Director.