CBO Analysis of the Long Term Budget

by Mike

After garnering an unexpected day off from my most gracious employer I found a little time to catch up on my “lite” reading list. One item of interest I came upon was a post from Douglas Elmendorf, Director of the Congressional Budgetary Office concerning the sustainability of the country’s long-term budget.

On his blog, Mr. Elmendorf has officially stated,

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.

Of course, anyone with half a brain could have easily figured this out on October 3rd, 2008 or February 17th, 2009. All this really does is confirm concerns from an official source.

Now, since a picture is worth a trillion words or more, here is a graph provided by the CBO representing the budgetary pitfall the Director is talking about.

The 800 lb. gorilla in the room is how does this affect your, the average American’s, day-to-day financial health? As pointed out by the CBO, we can expect one of three scenarios; heightened taxes in order to sustain the the government’s increased need for revenue, substantial cuts in government programs and spending, or some combination of the two.

The somewhat left leaning Brookings Institute offers a myriad of solutions which actually coincide with the CBO suggestions of raising taxes and cutting spending. These two, besides lowering interest rates further and blaming Bush, seem to be what we can expect.

• It will prove difficult to close the gap entirely via modifications to existing taxes and spending programs. A new revenue source, such as a value added tax (VAT), may be needed. A VAT imposed at a rate between 15 and 20 percent would essentially close the fiscal gap under the Administration’s budget.
• To eliminate the long-term gap through reductions in health spending growth alone, the growth rate of spending on Medicare and Medicaid would have to fall by 3 percentage points annually over the next 75 years. That is, expenditures currently projected to grow at a rate nearly 2.5 percent faster than GDP during the next ten years would instead have to begin falling immediately as a share of GDP.

If you want health care reform, cap-and-trade, or just plain old big government, you have to pay for it and it is going to be expensive. Remember, “There Ain’t No Such Thing As A Free Lunch,” even if the Progressives tell you so.

With all of this in mind, it is just common sense that with these projected increases in government spending, as a percentage of GDP, the requirements to sustain this level of payrolls will require most everyone to shovel over their “fair share,” not just the top 5% of wage earners.