The Congressional Budget Office (CBO) issued a new budget forecast last week. It should be a wake-up call to policymakers, and to the candidates running for president. It is also a clear indictment of fiscal policy during the Obama presidency.
The forecast shows annual federal budget deficits rising throughout the coming decade, pushing total federal debt to levels well above the historical norm. CBO projects the federal budget deficit will be $544 billion in 2016, or 2.9 percent of GDP. By 2026, the annual deficit will be nearly $1.4 trillion, or 4.9 percent of GDP. Over the period 2016 to 2025, CBO expects the federal government will need to borrow an additional $9.4 trillion, pushing total federal debt up to $23.8 trillion, or 86 percent of GDP.
The deficits projected in CBO's forecast, and the level of debt they would cause, are almost unprecedented in the nation's history. The country borrowed massively during World War II, pushing debt up to 106 percent of GDP in 1946. But federal debt relative to the size of the economy fell quickly in the post-war years, and was only 50 percent of GDP by 1956.
CBO's new budget forecast is much worse than the one issued by the agency in August 2015. The primary reason for the deterioration are the budget deals reached in October and December last year. Those deals increased spending for defense and domestic appropriations, and reduced federal revenue to a level well below what was forecast in the previous CBO baseline. CBO estimates that these deals will add $749 billion to federal deficits over the coming decade.
CBO's projection of entitlement spending over the coming decade is also startling. In 2015, the federal government spent about $2.3 trillion on Social Security, Medicare, and a large number of other entitlement programs. CBO expects spending on this category of the budget will grow at an average annual rate of 5.5 percent from 2016 to 2026, pushing spending for these programs up to $4.1 trillion in 2026. By contrast, federal revenue is expected to grow at an average annual rate of only 4 percent over the coming decade.
These projections make it abundantly clear that current budgetary policy is unsustainable. If entitlement spending rises 5.5 percent each year, while revenues go up only 4 percent annually, the only way to prevent a massive widening of the deficit is by squeezing spending on defense and domestic appropriations. But the budget deal reached at the end of 2015 should dispel the myth that there are ways to cut tens of billions of dollars out of those slices of the budget. There is widespread agreement that the nation's defense budget is already too low, given the range of threats facing the country. And most spending for domestic appropriations is for agencies and programs with bipartisan support, such as the National Institutes of Health. There are wasteful programs that continue to get funding every year, but the savings that might be found in this part of the budget are very small compared with the size of the problem.
The nation's budgetary problems are also likely to be worse than CBO's forecast indicates. CBO does expect interest rates (and thus interest payments on the debt) to rise in the coming years. But the assumed interest rates are still well below the levels experienced throughout recent history. In 2020, CBO expects federal debt as a percentage of GDP to be roughly double what it was in 2000, and yet it believes interest rates on ten-year Treasury notes will still be lower than they were in 2000. If interest rates rise back to levels that are closer to the historical norm, federal interest payments will exceed CBO's forecast, and thus the deficit will be larger than predicted.
In addition, CBO's forecast assumes some provisions to raise revenue and cut spending will take effect, even though recent experience would indicate that is questionable. For instance, the recent budget deal postponed implementation of the "Cadillac tax" on high-cost insurance plans for two years, from 2018 to 2020. It is likely that the same coalition that successfully pushed for this delay will be back again to delay it further or repeal it altogether before it goes into effect. The CBO is counting on about $80 billion in revenue from this tax over the period 2020 to 2026.
Some blame for this dismal outlook falls to congressional Republicans, of course. They agreed to the recent budget deals and also to a whole series of other legislative items that widened federal deficits, including the recently enacted highway funding bill.
But most of the blame should be assigned to President Obama. He set the terms of fiscal decisions throughout his presidency and made it abundantly clear that nothing substantial would be done to slow the pace of rising entitlement spending. Indeed, his focus has been on expanding that portion of the budget, with new health entitlement subsidies and the liberalization of many rules governing low-income assistance programs. He also made opposition to GOP proposals for Medicare and Medicaid reform a centerpiece of his reelection strategy in 2012.
The president's opposition to serious entitlement reform came at an inopportune moment. The Baby Boom generation began turning 65 in 2011. Congress and the president could have taken steps several years ago to lessen the cost pressure associated with this massive demographic transition. But nothing was done, and the window for making adjustments before all of the Baby Boomers are retired is rapidly closing.
Like others before them, the president and his aides will spend their last year in office articulating what they believe to be the positive legacy of their time in office. But any fair assessment of the Obama years must acknowledge that the administration is leaving the nation in a perilous fiscal situation. Debt is at record levels, and budgetary pressures are rising as the population ages. A fiscal crisis of some sort looms on the horizon.
President Obama can be blamed for missing many opportunities to steer the country away from fiscal danger, and for pushing initiatives that have expanded the government's commitments without putting in place a lasting and durable way to pay for them.
James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.