The annual Budget and Economic Outlook published Tuesday by the U.S. Congressional Budget Office (CBO) is much shorter than it used to be, if only because it details just one forecast scenario. It contains its standard, more optimistic, baseline scenario, but does not explicitly provide the usual, more pessimistic, alternative scenario because … the former has caught up to the latter. Thanks to the Jan. 1 fiscal cliff deal, the alternative bad dream, which assumed that taxes would not increase much nor expenditures be much reduced, has become the new baseline reality.
Of course, little or no tax increase is not really a bad dream, except from the government’s point of view. But the fact that the fiscal situation continues to deteriorate despite the tax increases enacted by the fiscal cliff deal shows the seriousness of the U.S. fiscal problem.
The non-partisan CBO predicts that, in 2023, the federal deficit will still be close to US$1-billion and will amount to 4% of GDP (compared to 5% in 2013). Over this forecast horizon of 10 years, the sum of federal deficits will be US$7-trillion. By 2023, the federal debt will have remained at today’s level of roughly 77% of GDP.
But it could be as high as 87% of GDP if Congress were to continue what it has been doing — if, for example, it cancelled the automatic spending cuts due to kick in come March, abolished the 25% cut in Medicare (old-age public health insurance) payments scheduled for 2014, and prevented scheduled tax increases in the future.
It is important to realize that the continued deterioration of U.S. federal public finances is not due to tax cuts but to spending increases. The acclaimed spending cuts are merely cuts in forecast spending. The whole thing continues to grow. By 2023, federal outlays are now forecasted to rise to 23% of GDP, compared to an average of 21% over the past 40 years. As for federal revenues (essentially taxes), they will by then have reached 19% of GDP, compared to a 40-year average of 18%.
These dire predictions do not include the impact of unexpected events — a recession or a new war, for example. On the other hand, it may be that lower federal spending, if it is allowed to kick in, would boost the economy, instead of slowing it down as the CBO, like all good Keynesians, assume. But whatever happens, it is nearly certain that the U.S. fiscal situation will remain problematic.
The problem is not some temporary fiscal cliff, but a deep fiscal precipice. As the CBO admits again in yesterday’s report, “such a large debt poses an increased risk of precipitating a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”
The underlying problem in the U.S. federal finances is not very original. It is the same as in most Western countries, with a bit of a vengeance: Expenditures are higher than revenues, and have been for five decades. Since 1961, the federal government has recorded a surplus in only five years.
The Great Recession of 2008-09 only deepened the problem. At the end of 2010, when the impact of the economic crisis should have abated, just one-third of the federal debt had been created by the recession; two-thirds had accumulated before (including one-third from the mid-1990s through 2007).
Longer-term forecasts published by the CBO last August, as well as similar forecasts by the Government Accountability Office (GAO), show that growing expenditures on Social Security (public pensions) and especially on public health insurance programs will push federal debt on a steeply upward trajectory after 2023. Although “Obamacare” (created by the Affordable Care Act of 2011) will add to public health expenditures, the main culprit is Medicare, which started in 1965.
Next summer, the CBO will publish its new 75-year forecasts. It won’t be pretty. The very long-run outlook is necessarily worse than the 10-year forecast because it includes the full impact of an aging population and of increased spending on entitlements such as Social Security, Medicare and other public health insurance schemes. A few years ago, the GAO was forecasting a federal debt of more than 900% of GDP in 2085 — and not much has changed since. Last year’s forecasts by the CBO and GAO suggested that solving the long-term fiscal gap in the federal finances would require a reduction of federal spending by one-third, or alternatively a 50% increase in all federal tax rates.
The problems emphasized by yesterday’s CBO report are thus not new. And they won’t disappear until their deep cause is acknowledged: American taxpayers don’t want to pay for the promises of the welfare state, which counts for 60% of the federal budget.
Pierre Lemieux est Senior Fellow à l'Institut économique de Montréal. Il signe ce texte à titre personnel.