The CBO Issues Most Dire Warning On US Budget Yet, Warns US Debt Will "Swiftly Be Pushed To Unsustainable Levels"

Tyler Durden's picture

In its just released Long-Term Budget Outlook, the CBO has come out with the most dire warnings on the US projected debt  to date. In summary, the healthcare spending and the Social
Security will consume an increasing portion of the budget and will push the national debt up sharply unless lawmakers act,
CBO Director Douglas Elmendorf warned. "CBO projects, the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed." While this does not sound too dramatic, the way it is attained is with the following ludicrous assumptions (which Paul Krugman would certainly call perfectly normal): "government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II." Good luck with that. In the more realistic, alternative fiscal scenario, the CBO observes, that "with significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035." The CBO's conclusion is a nightmare to each and every hard-core Keynesian fundamentalist (you know who you are): "the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them."

The summary critical presentation from the Congressional Budget Office (the full one with a lot of useless charts can be found here). This is very apropos as the US will likely never againhave a budget again so long as the current administration is in place.

The Long-Term Budget Outlook

Recently, the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (as measured by gross domestic product, or GDP), a little above the 40 year average of 36 percent. Since then, large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year—the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments.

As the economy recovers and the policies adopted to counteract the recession and the financial turmoil phase out, budget deficits will probably decline markedly in the next few years. But over the long term, the budget outlook is daunting. The retirement of the baby boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many years (although the magnitude of that gap is very uncertain). Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future trends in the economy, demographics, and health care costs.

The Outlook for Major Health Care Programs and Social Security

CBO projects that if current laws do not change, federal spending on major mandatory health care programs will grow from roughly 5 percent of GDP today to about 10 percent in 2035 and will continue to increase thereafter. Those projections include all of the effects of the recently enacted health care legislation, which is expected to increase federal spending in the next 10 years and for most of the following decade. By 2030, however, that legislation will slightly reduce federal spending for health care if all of its provisions are fully implemented, CBO projects. That reduction in the level of spending in 2030 yields lower projections of health care spending in the longer term—even though, owing to the great uncertainties involved in projecting such spending many decades in the future, enactment of the legislation did not cause CBO to change its estimates of longer term growth rates for spending on the government’s health care programs.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, albeit much less dramatically. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2030 and then stabilize at roughly that level.

All told, CBO projects, the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed. (By comparison, spending on all of the federal government’s programs and activities, excluding interest payments on debt, has averaged 18.5 percent of GDP over the past 40 years.)

To put U.S. fiscal policy on a sustainable path, lawmakers would have to substantially reduce the growth in outlays for those programs relative to the amounts that CBO is projecting—or else match that growth with equivalent declines in other federal spending, corresponding increases in federal revenues, or some combination of the two.

Alternative Long-Term Scenarios

In this report, CBO presents the long-term budget picture under two scenarios that embody different assumptions about future policies governing federal revenues and spending. Budget projections grow increasingly uncertain as they extend farther into the future, so this report focuses largely on the next 25 years. However, because considerable interest exists in the longer-term outlook, figures showing projections through 2080 and associated data are available in Appendix A of the report, and associated data are available on CBO’s Web site (www.cbo.gov).

The first long-term budget scenario used in this analysis, the extended baseline scenario, adheres closely to current law. It incorporates CBO’s current estimate of the impact of the recently enacted health care legislation on revenues and mandatory spending. (That estimate is unchanged from the one that CBO and the staff of the Joint Committee on Taxation published in March, when the legislation was being considered.) Under this scenario, the expiration of most of the tax cuts enacted in 2001 and 2003, the growing reach of the alternative minimum tax, and the way in which the tax system interacts with economic growth would result in steadily higher average tax rates.

Those rising rates, combined with the tax provisions of the recent health care legislation, would push total revenues to 23 percent of GDP by 2035—much higher than has typically been seen in recent decades—and to larger percentages thereafter. At the same time, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II.

That significant increase in revenues and decrease in the relative importance of other spending would offset much—though not all—of the rise in spending on health care programs and Social Security. As a result, debt would increase from its already high levels relative to GDP, as would the required interest payments on that debt.

Federal debt held by the public would grow from an estimated 62 percent of GDP this year to about 80 percent by 2035. Interest payments, which absorb federal resources that could otherwise be used to pay for government services, currently amount to more than 1 percent of GDP; under this scenario, they would rise to 4 percent of GDP (or one-sixth of federal revenues) by 2035.

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates 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 for a long period. In this scenario, CBO assumed that Medicare’s payment rates for physicians would gradually increase (which would not happen under current law) and that several policies enacted in the recent health care legislation that would restrain growth in health care spending would not continue in effect after 2020. In addition, under the alternative scenario, spending on activities other than the major mandatory health care programs, Social Security, and interest would fall below the average level of the past 40 years relative to GDP, though not as low as under the extended baseline scenario. More important, CBO assumed for this scenario that most of the provisions of the 2001 and 2003 tax cuts would be extended, that the reach of the alternative minimum tax would be kept close to its historical extent, and that over the longer run, tax law would evolve further so that revenues would remain at about 19 percent of GDP, near their historical average.

Under that combination of policy assumptions, federal debt would grow much more rapidly than under the extended-baseline scenario. With significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by  2025 and would reach 185 percent in 2035.

Neither of those scenarios represents a prediction by CBO of what policies will be in effect during the next several decades. The policies adopted in coming years will surely differ from those assumed for the scenarios. (And even if the assumed policies were adopted, their economic and budgetary consequences would certainly differ from those projected in this report.) Nevertheless, these projections, encompassing two very different sets of policy assumptions, provide a clear indication of the serious nature of the fiscal challenge facing the nation.

The Impact of Growing Deficits and Debt

In fact, CBO’s projections understate the severity of the long-term budget problem because they do not incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy:

  • Large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States.
  • Growing debt would also reduce lawmakers’ ability to respond to economic downturns and other challenges.
  • Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.

Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections, or some combination of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them.

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mtomato2's picture

I don't exactly know what you're saying, here, but I don't think I like it.  Junk.

perchprism's picture

I had the pleasure of junking him out of existence with junk #20.

Votewithabullet's picture

...great, and anyone who shows up at 19:08 has no idea what you pussies are crying aboot.(canadian)

TuesdayBen's picture

Actually, it was 21:57 for me!~

Clayton Bigsby's picture

Timmay?  Bernokio?  Is That You?

Paladin en passant's picture

Looks like a psychotic break to me...

Put some haloperidol on that and it'll be better in the morning.

Sudden Debt's picture

Every empire lasts about a hundred years. For America that sums it all up.

First Europe, then America and now the fire of glory will go to Asia.

But it's not like it's over. Even in Europe, there are more millionaires on average then there are in America. So it's doesn't mean it will all be bad.

If you're rich, you'll probably be rich still.

And if you're poor... you'll still be fucked

:)

zevulon's picture

amen. except by asian you mean china. not india.

Sudden Debt's picture

The world need poor people, and it needs rich people. Communists tried to fix that one but we all know how that turned out :)

Why the insults? There's no need for it.

The poor, the less fortunate: They all should take the bull by the horns and do something about their situation.

Oké, some lack the brains, but even the biggest retard can become president!

99% of the poor people are poor because they are more concerned about being poor then to do something about it.

 

Ragnarok's picture

Amen, i know some dumb as shit back water east Louisiana trash that work on the rigs and can clear over a 100K a year.  Why? Because they got off their asses worked 12h days and learned a useful skill.

New_Meat's picture

Not to worry, they have been found out and the drilling ban will take care of that mistake in the world's most perfect system.

- Ned

ColonelCooper's picture

"99% of the poor people are poor because they are more concerned about being poor then to do something about it"

Maybe in America, or another "free" country, but to say all poor people have the choice to be otherwise is asinine.

TuesdayBen's picture

ANY fricking idiot not afraid to bang on doors can become a Realtor at 18 and drive a Mercedes.

mtomato2's picture

What in the hell is wrong with this troll?  Where did he come from?

Takingbets's picture

I think he's one of those buy and hold investors. They come out swinging when they see red.

You know, just like a Bull. :-)

Mercury's picture

America isn't an empire by any stretch of the imagination even if everyone says so. Look at what past empires actually did - governors, taxes, tribute  - what do you suppose our return on investment in Iraq is so far?  And every empire does not last "about 100 years" either.

in Europe, there are more millionaires on average then there are in America.

Where do you get this crap?

Suisse's picture

Take a look at how many military bases the U.S. has overseas. Of course it's an empire, it's just not so direct. Who needs to levy taxes when you require access to their markets?

New_Meat's picture

Military bases?  As Empire??  How about as welfare (indirect) payments.  Germany was about $2B/year of free money injected into the economy.  The PI?  Was almost a fight until Clarke Field got buried, then US got kicked out/left and the citizens went crazy to get G.I. to come back.  Same as RoK, Rummie agreed to remove U.S. forces, crying and weeping among the people and eventually the pols.

Powell shut down this argument with "all we asked for is a 3x6 plot to bury our dead."

- Ned

P.S. Interesting story about Jim Jones assignment when Rummy was breaking down the "Old Europe" mess.  Worth a look.

Quintus's picture

Taxes? Tribute?  What do you think the 'Exorbitant Privilege' that allows the US to ship endless quantities of paper dollars overseas in return for real goods is?  Fortunately this legacy of Bretton Woods is in its last days now.  Soon, the US is going to have to work (i.e. export real products) for its living.

Sudden Debt's picture

Fact.

I'm from Belgium. Here about 10% is dollar millionair.

And the average capital in the bank is 330.000 euro.

http://netto.tijd.be/budget_en_vrije_tijd/luxe/Belgie-_land_van_miljonairs.8286398-2215.art

(translation should be Dutch to English)

Almost everybody I know is rich, and when we end college or university most of us get about 100.000 euro to start with from our parents. That's the average.

But starting when we are young, we learn the value of money and how to make it and save it.

We do have poor regions, every country has that. Bummer for them.

Mercury's picture

Belgium isn't a very big country and is not representative of Europe as a whole. Liechtenstein probably has a lot of per-capita millionaires too. No one in Scandanavia says "everybody I know is rich."

TuesdayBen's picture

Uh, y'all better get some gold.

awells's picture

With GP per capita $36K (CIA Factbook), that is some achievement. perhaps they all inherited their millions, but come to think of it, history does not support that either.

barkingbill's picture

so we have all the disadvantages of an empire, but with out it's benefits....does that sound good to you?

 

fact is. defense spending is out of control. it too must be cut. 

Mercury's picture

Yes and

Maybe, or at least the pieces could certainly stand to be rearranged on the board. But Obama won't cut back on the military without guaranteeing those soldiers government jobs [and then what have you saved?] since it will just add fuel to the unemployment fire.

baserunr's picture

Yes, defense spending is higher than it needs to be. We need to reduce the number of bases and personnel overseas without a doubt.  But at least spending on defense is something clearly laid out in the Constitution.  Most of the rest of the stuff that money is spent on has no constitutional basis at all.

 

Of course, the Constitution also provides that Congress can borrow and regulate the value of money.  And look where that has taken us.....

Ragnar D's picture

I'm all for cutting off the free ride to Europe (while keeping an appropriately strong domestic defense), but that's mainly what it would be:  cutting off welfare to Europe.

Don't pretend for a minute it would put a dent in how bankrupt we are.  Completely scrapping the military in its entirety would still leave us bankrupted by the pyramid scheme dependency programs.

Military spending increases linearly, and those increases can be halted at any time.  The Entitlements increase logarithmically, and by definition those increases are automatic.

 

The anti-military types avoid this by talking about the "discretionary" budget, but the non-discretionary stuff is already 2/3 of the budget, making it the far larger problem.  In a few years when Entitlements make up 90% of the budget, you could eliminate EVERY function of government, legitimate or not, and still be broke.

Mercury's picture

Right.  Look at it this way, you can only blow money on a war once but government programs are forever...

Paladin en passant's picture

You might want to increase your sample size.  Try including Rome, the Holy Roman Empire, a few of the Chinese dynasties, some Mesoamerican empires and so forth.  Hell, America's just getting started.  We've got at least another 900 years to go. In ten years this'll all seem like some bad dream. Nanotech, genetics and the Singularity are going to make your grandchildren think you lived in the stone age.

DocLogo's picture

For some reason I think the future will look upon us as the giants of history...the industrial revovolutionaries who built the world before things slowed down and became more agrarian again.

Paladin en passant's picture

Could be.  The thrust of ten-thousand years of history is toward increasing incomes,increasing knowlege and increasing freedom.

The ultimate disintermediation might be losing governments and living agrarian, urban or suburban, whatever you choose, because everything you need is available at such infinitesimal cost to everyone that "work" becomes something only the best and brightest strive to achieve.  If nanotech could give me total physical protection from anything but a nuclear weapon, what do I need government for?

Of course, we'll need to survive the oncoming worldwide depression first, but once we're on the other side of the next five to ten years, things are going to look much different.  And, personally, I expect that "different" to be something positive, not some Morlock-Eloy dystopia.

TuesdayBen's picture

I'm thinking nanotech, genetics, Singularity and gubmint will have the grandkids living in the Stone Age.

downwiththebanks's picture

That's all spiffy, but high orders of bloodshed will accompany this reality.

WeeWilly's picture

Sudden, I like getting fucked! Maybe I'm missing something?

-sarcasm-

DosZap's picture

 "Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed."

25yrs?.............What the hell are they smoking in the Beltway. THis country won't LAST another 5yrs, at the rate O is taking it.

Unless the programs he's instituted with the rest of the MINIONS from hell, are stopped.

Wait till he's a Lame Duck,(after Nov) Battle Royale...........

StychoKiller's picture

http://reason.com/blog/2008/10/24/saving-social-security-episode

My Daughter (24 this year) already KNOWS that Social Security is not gonna be there when she retires.  I believe a lot of younger folks know it too!

hutrader's picture

I'm 28 and I've known it for YEARS now...I look at my taxes as a service to my country...period. I love my grandparents and all of those from that generation so I don't mind paying the taxes for them to live. Hell they deserve a shit load more than just 1,000 bucks a month (and that's if they're lucky)....they kept the USA together when the whole world could have fallen apart AND they made us a truly great nation, which was latter destroyed by those that followed b/c they didn't know how to save, how to think, how to wait, and how to work for what they want. This all comes down to trying to keep up with the Jones' even on an international scale...the USA is just a spoiled little piece of shit and their rich daddy is dying as we speak and can't front the bill anymore. You mean we have to DO SOMETHING to get what we want?!?!?! Wake up America!!! (I am referring to the politicians and government NOT the people...that's what makes this whole mess even worse). Give me some whiskey now

adissidentishere's picture

You are an old soul.  I mean that, no sarcasm at all.  I'm glad to know there are people under 30 who think like you do.  Keep educating and for god sake watch the alcohol!  Starting out life with eyes wide open in this day and age is enough to drive anyone to despair.  Then again, you can't quit before the fight has even begun.  Because it hasn't begun yet. All we're doing right now is the smack-talk as prelude to the real event. 

HungrySeagull's picture

You Sir, are a credit to your Parents. I salute you.

Careful with that Bottle. You are perhaps in need of a slight nip after considering such a future in this Nation... but it is not worth destroying your life.

As young as you are, you are going to be a Giant among men someday.

 

That is why the other Poster referred you as an Old Soul. It is a compliment given to young folks who see as clearly as we do and have the youth and strength to try to do something about it in that clarity.

nmewn's picture

I'll add mine to the growing chorus as well...old soul means, to me, prudence. Maybe there is hope.

Freedom is a beautiful thing, enjoy it lustily, with an eye toward moderation ;-)

Regards.

Village Idiot's picture

"My Daughter (24 this year) already KNOWS that Social Security is not gonna be there when she retires.  I believe a lot of younger folks know it too!"

 

A lot of older folks do too.  As far as "agrarian" fallback is concerned, I like it.

marc_hanes's picture

I'm 43 years old and the last thing I expect in life is social [sic] security when I "retire"...

Island_Dweller's picture

I'm 43 years old and the last thing I expect in life is social [sic] security when I "retire"...

 

ditto @ 45. 

 

I, however, don't feel so great about paying for the "greatest generation" like an earlier poster.  In my book, they are the luckiest generation as they got to be the top of the ponzi pyramid.  I'm sick of their stupid asses.  They've done pretty well considering how lame of a legacy they've left us.  And to top it off, I have to listen to them all the time complaining how there's something wrong with youth today.  Yeah, cause baby boomers and the greatest generation left them a shit world.....

 

 

 

 

 

 

 

sgt_doom's picture

Of course, that red herring Social Security (contrary to everyone's super hero/swine, Peter G. Peterson, and the Peterson Institute, and Blackstone Group, etc.) has essentially nothing to do with it (good 'til 2044 as it's a pay-ahead tax), it's about the public monetization of private debt (i.e., the American economy cannot possibly SUSTAIN all those debt-financed billionaires, trillionaires, and multi-millionaires), as well as perpetual wars which make up the bulk of deficit spending.

 

Ragnar D's picture

Social Security wasn't supposed to go broke til 2038.  Then 2025.  Then 2018.  A black swan here and there, and it turns out 2009 it went into the red.

We also have the smallest percentage of the population working ever (and this was the trend before unemployment notched up--I'm talking about the career nonworkers), and an ever-increasing population living on other people's confiscated earnings.

There's no math that makes this pyramid scheme work.  Bump up retirement a year at a time, steal even more of our earnings that we'll see a negative return on, etc; that's just fiddling with the details.

There's no system of rewarding those riding in the cart and punishing those pulling it that will not multiply the former and decimate the latter.  Look at all the ailments Britons have invented to get on the dole.

There's a reason real jobs don't have pensions:  they last as long as they can throw someone else's money away before consuming everything and blowing up.  You cannot promise people a check forever, completely divorced from what they input.  It does make a hell of a dependency program to keep the omnipotent-government types in office.

RaymondKHessel's picture

It better last another 5 years I have to wait till 1/1/2015 to withdraw my Roth IRA conversion $$$$ without penalty !

Shameful's picture

What a load!  No way will we hit those rosy predictions.  87% debt to GDP in 2020?!? 109% in 2025?!?   Only if a hoard of magic leprechauns sneak into the country with pots of gold, and pay their taxes.  When when the CBO tries to look tough they look unbelievably Pollyannish.  And spending will not decrease, it can't.  I've said before that if you put the American Ponzi into austerity it's game over.  Anything to spook the dollar (like public announcing "We're screwed!") will send dollars back to the US which will trigger further selling.  The train is at full speed and is locked on the tracks.  It's infinite stimulus or bust!

Also  the link to full report is the same as to the summary.

Ragnarok's picture

The CBO can only deal with what it is given, no? So, lies in = lies out.

Shameful's picture

Ok you got me there.  I would just be ashamed to put my name on that.  Well unless I was marketing it as a fiction work.  Maybe it's the accountant in me...I feel repulsed by the very idea of signing off on something I KNOW to be a fraud.

But if they are going to cook the numbers, why not just go nuts?  Assume 20% year to year growth.  Since it's a lie why not lie big?

"Bt 2025 the government will provide free luxury cars and McMansions to all citizens.  People will retire at 22 with 2000% of their income as pension.  The Cardinals will win the Super Bowl"