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Previewing The Bad News That’s Likely To Complicate The Debt Ceiling Battle

Tyler Durden's picture




 

Submitted by F.F.Wiley of Cyniconomics blog,

The gorilla in the room may sleep soundly for the rest of July and August, but expect a foul temper when he wakes up in September. At that time, Congress once again haggles over our debt ceiling.

Treasury Secretary Jack Lew tells us the government can operate under its existing borrowing limit until at least Labor Day, although it’s generally assumed the limit can be stretched until October or November.

Lew also called on Republicans to agree a no-strings-attached increase, but most analysts consider this hopeful request to be political posturing. More plausibly, we’ll be treated to another shining example of government dysfunction.

While we await the drama, I’ll preview another upcoming development that should set the tone for the battle – release of the Congressional Budget Office’s new long-term debt projections, which typically extend 75 years into the future. These are out later than usual this year, due to the Budget Control Act spending cuts that went through in the spring. Instead of the normal June publication, the CBO says to expect its report in September. In other words, just as borrowing limit negotiations begin to heat up.

But why wait that long?

I’ll share my projections here and now, using most of the same inputs and methods employed by the CBO. You may be surprised by the outcome.

Here’s my approach:

  1. Start with the CBO’s ten year projections, which were last updated in May.
  2. Extend them beyond the tenth year by mimicking the CBO’s methods as closely as possible.
  3. Adjust the longer-term projections based on differences between the 2012 and 2013 Trustees’ Reports for Social Security and Medicare (to capture the recent reports’ more optimistic cost projections).
  4. Add two extra scenarios to the CBO’s usual “baseline” and “alternative” scenarios.

And here’s the chart showing projections for the next 24 years (with a longer time period included at the end of the post):

debt projection 1

I’ll fill in more details in later posts, and particularly for the two extra scenarios – the “recessions really exist” (click here for background) and “trust fund debt counts” (click here for background) chart segments.

For now, the key takeaway is that September’s official projections are almost certain to include some bad news that wasn’t visible in the ten year projections that the CBO updated in May. Our growing numbers of retirees won’t begin to overwhelm the existing entitlement structure until beyond the May report’s forecasting period.  Once we have the long-term projections, though, these demographic effects will be more obvious than ever.

A closer look at the baseline scenario’s new direction

To further demonstrate the new information that we’ll have in September, here’s a comparison of last year’s baseline and alternative scenarios (from the CBO’s “2012 Long-Term Budget Outlook”) to this year’s scenarios (using the May updates for the first ten years and CYNICONOMICS projections thereafter):

debt projection 2

The big differences between the last report and the upcoming report are explained mostly by January’s tax law changes, which made the bulk of the 2001 and 2003 tax cuts permanent.

In the past, the baseline scenario assumed expiration of virtually all tax cuts going back to 2001, according to statutes requiring projections to follow “current laws.” This unrealistic assumption left the baseline projection far below the alternative scenario, in which cuts were presumed to be extended per usual practice. And the wildly different results allowed people to conclude whatever they wanted to conclude. For those who aren’t inclined to take a long-term view, it was easy to focus on the steadily improving baseline and declare no need to worry.

In the upcoming projections, the chart predicts that the gap between the baseline and alternative scenarios won’t be nearly as extreme as before.

More importantly, even the baseline scenario shows rising debt through the 2020s and beyond (unless the CBO unexpectedly revamps its approach). This is quite a change from past projections, considering that the baseline has consistently shown our debt withering to nothing over time.

Of course, people will still see what they want to see. But long-term thinkers should have more evidence that something needs to be done, while short-term folks will find it harder to get away with their claim that the problem’s solved.

In other words, September’s report should set a sober tone for the debt ceiling shenanigans, demonstrating more clearly than ever before that our current direction is unsustainable.

And here are the really long-term projections

The last chart (below) shows projections to 2080.  These are, of course, more speculative than the shorter horizons shown above.  That said, once you consider that Congress habitually loosens the “current law” budget constraints of the baseline scenario, the sheer scale of the long-term projections in the other scenarios is particularly alarming.

debt projection 3

 

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