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Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance 1 (December 2010)

handle is hein.congrec/cbo7088 and id is 1 raw text is: CBO A series of issue summaries from the Congressional Budget Office DECEMBER 2010 Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance Summary and Introduction Under current policies, the aging of the U.S. population and increases in health care costs will almost certainly push up federal spending significantly in coming decades relative to the size of the economy. Without changes in policy, spending on the government's major mandatory health care programs-Medicare, Medicaid, the Chil- dren's Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges as well as on Social Security will increase from the present level of roughly 10 percent of the nation's output, or gross domestic product (GDP), to about 16 percent over the next 25 years. If revenues remain at their past levels rela- tive to GDP, that rise in spending will lead to rapidly growing budget deficits and mounting federal debt. In June 2010, the Congressional Budget Office (CBO) issued long-term budget projections under two scenarios that reflected different assumptions about future policies for revenues and spending.' The extended-baseline sce- nario was based on the assumption that, by and large, current law would continue without change. Under that assumption, revenues would climb to a higher share of GDP than has typically been seen in recent decades. Even so, federal debt held by the public would rise from 62 percent of GDP at the end of fiscal year 2010 to about 80 percent of GDP by 2035. Only once before in U.S. history-during and shortly after World War II-has federal debt exceeded 50 percent of GDP. CBO also pre- pared budget projections under an alternative fiscal sce- nario, which incorporated several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain 1. See Congressional Budget Office, The Long-Term Budget Outlook (June 2010, revised August 2010). Pages 19 and 20 of that report described preliminary results from an analysis of the issues addressed in this brief; those results are updated here. for a long period. Under that scenario, debt would soar above its historical peak (about 110 percent of GDP) by 2025 and continue climbing thereafter. To prevent debt from rising to unsupportable levels, pol- icymakers would eventually have to restrain the growth of spending, raise revenues significantly above their histori- cal share of GDP, or pursue some combination of those two approaches. Addressing the long-term budget imbal- ance would, at a minimum, require stabilizing the ratio of debt to output. In deciding when and how to do that, an important consideration is, what are the costs of delay? Effects of Delaying Action Waiting to put fiscal policy on a sustainable course would lead to higher levels of government debt, which would be costly in several ways: Higher debt would reduce the amount of U.S. savings devoted to productive capital (resources that produce economic benefits over time) and thus would result in lower incomes than would otherwise occur, making future generations worse off. Higher debt would necessitate greater federal spending on interest payments, meaning that larger changes in revenues and noninterest spending would be needed to make fiscal policy sustainable. If those changes took the form of bigger cuts to spending programs, they would be more difficult for people to adjust to than smaller cuts would be. If the changes took the form of bigger increases in marginal tax rates, they would cre- ate larger disincentives to work and save, which would reduce incomes more than smaller tax increases would. Higher debt would make it harder for policymakers to respond to unexpected problems, such as financial crises, recessions, and wars.

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