A Grim Budget Outlook

As President Obama has said, the budget really is something to lose sleep over.

Current deficits are enormous due to the weak economy, fiscal stimulus, and the costs of fighting the financial crisis. But the long-run outlook is even scarier, with Medicare, Medicaid, and Social Security pushing spending up much faster than tax revenues.  The result is a tsunami of debt.

How much debt?

Well, the folks at the Congressional Budget Office have just released their latest projections of the long-run budget situation. Here is the key graph:

CBO Long Run

If current trends continue, CBO projects that the level of debt, relative to the size of our economy, will grow to unprecedented levels — and keep going. Within a few decades, the ratio of debt-to-GDP could surpass the peak of World War II.

That level of debt is not sustainable. As CBO notes:

Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States. Over time, the accumulation of debt would seriously harm the economy. Alternatively, if spending grew as projected and taxes were raised in tandem, tax rates would have to reach levels never seen in the United States. High tax rates would slow the growth of the economy, making the spending burden harder to bear.

What’s the solution? Well, CBO can’t be overly specific — its job is to present the facts, not draw policy conclusions — but here’s the advice:

Policymakers could mitigate the economic damage from rapidly rising debt by putting the nation of a sustainable fiscal course, which would require some combination of lower spending and higher revenues than the amounts now projected. Making such changes sooner rather than later would lessen the risks that current fiscal policy poses to the economy.

In short, we need to address this problem as soon as possible.  Waiting only lets the problem fester, increasing the risk to our economy.

Note: CBO considers two long-run scenarios. In the “extended-baseline scenario,” CBO takes the current law as given, even if there’s reason to believe that Congress will make changes. In the “alternative fiscal scenario,” CBO tries to capture what today’s underlying fiscal policy actually is; this combines current law with assumptions about changes to the law are likely. The second scenario leads to faster-growing debt because policymakers are assumed to do things that worsen the deficit: e.g., extend tax provisions that expire at the end of 2010 and prevent dramatic cuts to physician payment rates in Medicare.

7 thoughts on “A Grim Budget Outlook”

  1. “When Something is unsusttainable….it will stop”

    The real issue is who is going to have any risk capital (or the appetite to deploy it) left, and then you end up spending even more resources fighting for the remaining crumbs.

    It has to end in a `Jubilee` — hopefully it is a peaceful one.

  2. The present situation is at the opposite of what happened in 1999. At the time, CBO forecast a huge surplus in 2009. Nothing of that kind could happened and .. did not happened. It will be the same this time but an other away. US debt will not balloon for ever. What is worrying, is that growth could be a problem. It is not sure that the US national savings will decrease. Household could be more carefull than during the last twenty years. That just raises a question: What will be the beheaviour of the consumer in the future?

    Anyway, thank you very much for the outstanding quality of your publication.

    Best regards,


  3. Commenters 1 & 2 are precisely why I am concerned about the projected debt. I fear their attitude mirrors the current administration’s: it will never really happen, so I don’t need to do anything about it. The left right now is beyond the pale with their spending, like a drunk chugging drinks before the last call. At some point an adult needs to impose some fiscal discipline before the unsustainability of this mess bankrupts our nation.

  4. I’ve been included in taxations for longer then I care to acknowledge, both on the private side (all my working life!!) and from a legal point of view since passing the bar and following up on tax law. I’ve rendered a lot of advice and corrected a lot of wrongs, and I must say that what you’ve put up makes utter sense. Please carry on the good work – the more individuals know the better they’ll be equipped to cope with the tax man, and that’s what it’s all about.

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