In its latest long-term budget outlook, the Congressional Budget Office has some troubling numbers.
According to the CBO, the long-term budget picture of the US, having seen a modest rebound in recent years, is about to take another big step down driven primarily by the US demographic shift. Specifically, it says that if current laws on taxes and spending remain, "deficits and federal debt held by the public would remain roughly stable in the near term, reflecting the anticipated further strengthening of the economy and constraints on federal spending built into law" however it cautions that "the outlook for the budget would steadily worsen over the long term."
Well, one can debate whether the US economy is strengthening, especially when one considers that in reality quite the opposite is taking place...
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... confirmed recently by none other than Goldman which last month cut its long-term potential growth rate for the US by half a percent from 2.25% to 1.75 [7]%.
That about covers the persistent upside bias to CBO forecasts. Now the downside.
According to the CBO, "mainly because of the aging of the population and rising health care costs, CBO's projections show a substantial imbalance in the federal budget over the long term, with revenues falling well short of spending. As a result, budget deficits are projected to rise steadily and federal debt held by the public is projected to exceed 100 percent of GDP by 2040, a level seen only one previous time in US history - the final year of World War II and the following year."
There's that World War II reference again.
Visually, this looks as follows:
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The projected rise of the debt in question:
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And while the CBO expects a gradual, constant increase in the net interest outflows (once again a very optimistic estimate) rising to a little over 4% of GDP from the current level of just about 1%, it is the US health care programs meant to take care of an ever older population that trouble the CBO the most:
Growth in the major health care programs - Medicare, Medicaid and subsidies for health insurance purchased through exchanges created by the Affordable Care Act - and Social Security is projected to exceed the decline in other noninterest spending relative to GDP.
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The main drive for the deteriorating US budget picture is a simple one: an ever older population, one which demands increasingly more welfare spending.
The aging of the population will increase the share of the population receiving benefits and also affect the average ago of beneficiaries. Health care costs per beneficiary, adjusted for demographic changes, will grow faster than economic output per capita as they have historically. Finally, enrollment in Medicair under the ACA and the number of people receiving subsidies for health insurance purchased through the exchanges are projected to continue toi increase.
This in chart format:
So what can the government do to put the country on a sustainable path? Simple: enact austerity.
To put the federal budget on a sustainable path for the long term, lawmakers would have to make major changes to tax policies, spending policies, or both - by reducing spending for large benefit programs below the projected amounts, letting revenues rise more than they would under current law, or adopting some combination of those approaches.
And here are the troubling numbers in question, numbers which would put the Greek austerity to shame, because according to the CBO if the US wants to return back to its long-term debt/GDP average of 38% of GDP, it needs to boost revenues by 14% or slash spending by 13%. Alternatively, if it wants to keep debt/GDP at its current level of 74% of GDP, the US will need to boost revenues by 6% of cut spending by 5.5%.
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Unfortunately for future US generations none of those will happen, which is why the "worst case" debt/GDP forecast in which the CBO is proven to be optimistic, as it always is, about mortality decline, productivity growth, interest and spending growth on Medicare and Medicaid, and which results in 144% debt/GDP in 2040 will be proven to have been far too low.
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Source: CBO [13] [13]
