The CBO Budget Outlook And The Problem Of Revenue

The Congressional Budget Office and The White House both offered appraisals of the federal deficit for the next 10 years. Each analysis yielded alarming numbers. The CBO figures estimated that the total red ink for the period will be $7.1 trillion. That is based on federal spending that accelerates 67% from 2008 to 2019 when it reaches almost $5 trillion. Revenue moves up even faster, 68%, which should be expected. It is rare that either the government or private enterprises set budgets which are not based on optimism about growing revenue.

GDP only rises 49% over the 2008 to 2019 time frame, reaching $21.1 trillion in the last year. That accounts for why the national debt as a portion of gross domestic product goes up so rapidly over the period of the forecast. CBO writes, “That debt, which was as low as 33 percent of GDP in 2001, would reach an estimated 54 percent of GDP this year and grow to 68 percent of GDP by 2019.” For people born before the beginning of this century and after the middle of the last one, the numbers mean high taxes for them, which will almost certainly undermine future growth.
No sane economist would say that forecasts get more accurate the further out into the future that they go, but the CBO’s picture of the 2014 to 2019 period should cause deep concern. GDP growth, which is predicted to be 4.5% per annum from 2012 to 2013 drops to 2.4% for the following five years. The interest paid on three-month Treasury bills goes from 3.6% in 2012 to 2013 to 4.7% in the half-decade after that. All in all, these numbers create a portrait of a country losing its economic edge, falling further into debt, and unable to make even modest controls to its spending habits.

The CBO puts a great deal of the blame on Social Security, Medicare, and Medicaid which will make up 12% of GDP in 2019 and as much as 17% in 2035. These programs may have great merit and may be the only social safety net that many Americans have, but they cannot survive as they are if the government reaches a point of financial crisis. The CBO is pointed about this saying, “If outlays for those programs reached that level, federal spending would be well above its historical percentage of GDP. Unless revenues were increased correspondingly, annual deficits would climb and federal debt would grow significantly, posing a threat to the economy. Alternatively, if taxes were raised to finance the rising spending, tax rates would have to reach levels never seen in the United States. Some combination of significant changes in benefit programs and other spending and tax policies will be necessary in order to attain long-term fiscal balance.”

And, that is the heart of the matter. The budget is set to make certain that virtually every major spending program and benefit that America and America’s allies enjoy now, they will also enjoy in the future. The Administration and Congress may not want to admit that this can’t be done, but there is no sign that either is prepared to make large cuts in government spending.

It is probably useless to point out that the only major shifts in government financial activity come during times of crisis whether these are wars or depressions. It is useful to point out that shifts in spending are possible, but are only triggered by sea changes in America’s status quo. What might be done by design is usually done out of desperation.
It would be a useful exercise for the government to assume that it is in a crisis period now. That would not be altogether an act. Analysts say that this is the worst economic downturn since the 1930s. Unemployment will be over 10% later this year. This is a deepening crisis even though it has not been widely identified as one yet.

There does not appear to be any interest in radical change in Washington if radical change means putting federal spending more in line with receipts. There may be some time to do this, or the time may have already arrived when circumstances will overwhelm the government’s plans. That would make it too late for Congress and the Administration to play “war games” and prepare for the next two years which are bound to be very difficult financially. The 2012 to 2019 period can be left to itself. Projections for the distant future will do nothing to solve a large set of imminent problems.

If there is a time in the last century of American history when the federal government willingly made meaningful changes to spending, it is hard to point out. That is because it has never happened.

Douglas A. McIntyre