The Congressional Budget Office’s updated, 10-year budgetary projections, released last week, confirm that President Obama left his successor a rapidly deteriorating fiscal outlook. Unfortunately, President Trump’s policies, while supposedly directed at balancing the budget, could easily end up making the situation worse.
CBO’s new “baseline — a forecast of federal revenue, spending, deficits, and debt — assumes current laws and policies will remain as they are today for the next 10 years. President Trump has modified a small number of relevant budgetary factors since taking office, particularly the level of defense spending in 2017. But, for the most part, CBO’s projections reflect the policies put in place during the tenure of the Obama administration.
It’s not a flattering review.
CBO expects the federal budget deficit to fall modestly in 2018, to $563 billion, from an expected level of $693 billion in 2017. After 2018, however, the deficit will rise rapidly, reaching $1.1 trillion in 2023 and nearly $1.5 trillion in 2027. Relative to the size of the U.S. economy, the deficit will rise from 3.6 percent of GDP in 2017 to 5.2 percent in 2027. From 1940 through 2016, the average federal budget deficit was just 2.1 percent of GDP.
The large projected deficits over the next 10 years will push federal debt to above 90 percent of GDP by 2027, up from 77 percent this year and from 39 percent in 2008. The United States has never had so much outstanding public debt except during World War II and the immediate post-war years.
The deteriorating fiscal outlook is the result of a combination of factors: modest economic growth, an aging population, rising health costs, and higher interest rates.
CBO expects the U.S. economy to grow at an average annual rate of just 1.5 percent in 2019 and 2020, and then at an average rate of just 1.9 percent from 2021 to 2027. From 1983 to 2008, the average annual growth rate in real GDP was 3.3 percent.
Although current growth is well below the norm, it is still enough to push the economy toward full employment, and thus also toward normalization of interest rates. CBO expects the annual interest rate on 10-year Treasury notes to rise from 1.8 percent in 2016 to 3.7 percent during the period 2021 to 2027. As a result, the federal government’s net interest payments on the debt will rise from 1.4 percent of GDP this year to 2.9 percent of GDP in 2027.
The driving force behind the nation’s fiscal problems is the relentless increase in entitlement obligations. As the population ages and health care costs rise, federal expenditures on Social Security, Medicare, and Medicaid will soar. In 2017, spending on just these three programs will be $1.9 trillion; in 2027, it will be $3.5 trillion. The federal government will spend an additional $13 trillion over the next decade above what would be spent if outlays were fixed at their 2017 level. More than 80 percent of that additional spending will be dedicated to Social Security, Medicare, Medicaid, and net interest on the federal debt.
For the most part, President Obama steered clear of trying to address the nation’s fiscal problems. After a possible bipartisan deal with then-House Speaker John Boehner fell apart in 2011, the president never really engaged with Congress on long-term fiscal matters during his time in office. He preferred to negotiate short-term deals that did not require decisions that would run counter to the traditional positions of the Democratic Party.
From 2011 to 2030, as the baby boom reaches retirement, the number of Americans age 65 and older will increase from 42 million to nearly 74 million. When President Obama left office earlier this year, the nation was no better prepared to deal with this unprecedented demographic transformation than when he arrived.
President Trump has proposed a balanced budget, which includes significant reforms to the Medicaid program. But the administration’s plan assumes both that the economy will grow eventually at an average annual rate of 3 percent and that the non-defense accounts funded through the annual appropriations process will cost just $429 billion in 2027, down from $619 billion this year. Neither of these assumptions is credible, and more realistic assumptions would show the budget produces large deficits throughout the next decade.
The president also wants to cut tax rates and increase defense and infrastructure spending, without pursuing any kind of significant reforms to Social Security or Medicare (his budget does propose some reforms to the disability portion of Social Security, but the savings are small compared to the size of the problem). Congress is inclined to go along with a push for tax cutting and higher spending on priority areas of the budget, while also postponing any serious consideration of entitlement reform beyond whatever can be accomplished on Medicaid in a health care bill. The net result could easily be a widening of future deficits compared to current law.
Closing the nation’s long-term fiscal gap is likely to require bipartisan compromise; the political risks are so high that neither party will want to tackle the issue on its own. During President Obama’s final six years in office, when Republicans controlled the House of Representatives, neither party could pass anything without the cooperation of the other party. This would have been an ideal moment to make progress on a set of fiscal challenges that will only get worse with time. But politics prevailed and the opportunity was lost.
Now, with Republicans in control of the White House and Congress, there is little prospect of bipartisan cooperation on major legislation. It is therefore possible — and perhaps probable — that another presidential term will come and go and the nation will still be no better prepared for the major fiscal challenges that lie ahead.
James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.