October 18, 2019

Budget Office Warns That Deficits Will Rise Again Because Cuts Are Misdirected

Annual federal deficits will continue to fall in the short term, the budget office reported in its yearly long-term outlook, because of the recent spending cuts in military and domestic programs and rising tax collections in a recovering economy. The report projected the deficit in 2015 to be equal to 2.1 percent of the economy’s output, or just one-fifth of the peak shortfall at the height of the recession in 2009.

But starting in 2016, deficits are projected to rise again as more baby boomers begin drawing from Medicare, Medicaid and Social Security — the fast-growing entitlement programs, which Democrats and Republicans cannot agree on how to rein in.

The accumulating federal debt, which averaged 38 percent of the gross domestic product for the 40 years before the 2008 financial crisis, would rise from 73 percent of the G.D.P. now — above what most economists consider an optimum level — to at least 100 percent in 2038.

Budget experts have been warning since at least the Reagan era that in the early 21st century, aging baby boomers will drive entitlement spending — chiefly for Medicare and Medicaid, and to a lesser degree for Social Security — to levels that will crowd out all other military and domestic spending. Interest on the debt will also be a major and growing expense.

What is different now is that the Republican-controlled House and the White House have been on a two-year run of deficit reduction that has resulted, because of their inability to agree on entitlement reductions and higher tax revenues, in deepening cuts in the budget areas that are not responsible for the projections of mounting debt. Those discretionary spending programs — which include things as varied as Pentagon weapons purchases, air traffic control, science and research, education and national parks — are being squeezed even as entitlement spending grows automatically.

The budget office said that by 2023, the annual deficit would rise to an estimated 3.5 percent of the G.D.P., which is just beyond the level that many economists consider sustainable in a growing economy. By 2038, it would be 6.5 percent.

Under a nine-year plan starting in the 2011 fiscal year, discretionary spending was already being reduced annually. But the across-the-board “sequester” that took effect in March, when Republicans and Mr. Obama could not agree on alternative deficit reductions, has pared domestic and military programs further, resulting in increasing layoffs, furloughs and service cutbacks.

Republicans have supported keeping the sequestration cuts in place rather than accepting Mr. Obama’s proposal for a mix of higher taxes on wealthy people and some corporations and cuts in future entitlement spending. And he has said he will not accept their alternative for deeper reductions in Medicare and Medicaid without tax increases.

Federal spending for the major health programs and Social Security will equal 14 percent of the G.D.P. in 25 years, double the level of the last four decades, the budget office projected. While federal revenues are projected to grow — to 19.5 percent of the G.D.P. by 2038, compared with the 40-year average of 17.5 percent — that rise is not enough to offset the spending for federal benefit programs.

In contrast with entitlement spending, discretionary spending for domestic and military programs by 2023 would fall to 5.3 percent of the G.D.P., from the 7.3 percent of this year — the lowest levels in about 70 years.

“Unless substantial changes are made to the major health care programs and Social Security,” the report said, “those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”

Jonathan Weisman contributed reporting.

Article source: http://www.nytimes.com/2013/09/18/us/congressional-budget-office-predicts-unsustainable-debt.html?partner=rss&emc=rss