The Congressional Budget Office’s latest forecast makes a convincing case that fiscal complacency is now dangerous for the U.S. economy. CBO projects the federal government will borrow an additional $12.4 trillion over the next 10 years. At the end of 2028, the federal government will have outstanding debt of $28.7 trillion, or 96 percent of GDP. Ten years ago, federal debt was equal to 39 percent of GDP.
In fact, CBO’s official projection is an optimistic scenario. It assumes Congress will let many of the tax-cutting provisions enacted in the recently passed tax legislation expire after 2025. It also assumes, even more implausibly, that the caps on defense and nondefense appropriations for 2020 and 2021 contained in the Budget Control Act of 2011 will remain in place, thus forcing deep cuts in federal spending. However, Congress just enacted a bipartisan agreement to raise the caps in 2018 and 2019 by nearly $300 billion over that two-year period. If the tax cuts are made permanent, and if discretionary appropriations grow with the rate of inflation after 2019, then the budget deficit over the next decade would be $15 trillion instead of the $12.4 trillion contained in CBO’s baseline forecast. In 2028, the annual budget deficit would widen to 7.1 percent of GDP, while total federal debt would reach 105 percent of GDP.
CBO has not yet updated its long-term budget forecast, but when it does the projection will show federal debt exploding at an alarming rate, as population aging and health-care costs push entitlement spending up at a rapid pace. Last year, CBO projected that federal debt would reach 150 percent of GDP by 2047. An updated forecast will show federal debt reaching that level much sooner.
The federal government’s massive fiscal problems will not be solved with more rapid economic growth. CBO rightly credits the recently passed tax bill with boosting business investment, productivity, and the size of the labor force. These are all important, positive developments for an economy that has suffered from sub-par performance for far too long. But the agency also notes that wider federal deficits and more borrowing by the government are drags on economic growth — a view that fiscal conservatives should share. CBO expects real GDP to grow at an average annual rate of just 1.9 percent over the period 2018 to 2028.
Recently, a group of distinguished economists tried to make the case that the nation’s fiscal problems should not be blamed on the growth of entitlement spending. The facts say otherwise. In 1970, federal spending on Social Security, Medicare, and Medicaid was just 3.7 percent of GDP. In 2019, CBO expects spending on these programs to be 10.5 percent of GDP. Over the next 10 years, the federal government will spend an additional $15 trillion above what would be spent if total outlays were frozen at this year’s level. Of that amount, $9.8 trillion will go entitlement programs, and another $3.7 trillion will be devoted to paying interest on the national debt. The federal budget is heavily weighted toward entitlement spending and will become more so in the coming years.
Republicans have responded to criticisms of their profligacy by seizing on two ideas that are both predictable and disheartening. The first is to take up and pass a Balanced Budget Amendment to the Constitution in the House.
There is a case to be made for such an amendment, especially to counter the natural tendency of democratic governance to favor short-term needs over long-term investments. Put another way, today’s voters are inclined to favor their current economic concerns over what should be done to invest in the future. But there are also serious problems with such an amendment, starting with how to enforce it. An amendment to the Constitution could invite the judicial branch to participate in tax and spending decisions — decisions that should be made by our elected representatives, not judges.
But the current push by Republicans to take up a version of a Balanced Budget Amendment is not really motivated by a desire to reorder our constitutional powers to ensure better economic governance. Rather, Republicans are pushing the idea in a feeble attempt to protect themselves from being blamed for the disastrous state of the federal budget. There is no prospect of securing a Balanced Budget Amendment to the Constitution, which would require the affirmative vote of two-thirds of the members in both the House and the Senate and ratification by three-fourths of the states. If Republicans were serious about taking action on the budget, they would offer a plan to reform entitlements and thus begin to lower federal spending over the next two decades — rather than float a constitutional amendment that they know stands no chance of being approved.
The second idea now under active consideration is a bill to cut spending this year, but only for annually appropriated accounts, not entitlement programs. President Trump has voiced criticism of the recently passed omnibus appropriations bill, which increased spending substantially both for defense and nondefense activities. (He seems not to understand that this added spending was a foregone conclusion when he agreed to raise the caps on discretionary appropriations as part of the bipartisan budget agreement which passed in February.) In response, the White House has proposed using an authority provided in the Congressional Budget and Impoundment Control Act of 1974 to make cuts to the levels of spending contained in the omnibus legislation. A bill considered under this special authority could not be filibustered in the Senate, which means that Republicans, at least in theory, could pass the spending cuts without needing any Democratic votes.
If Republicans can muster the votes to approve some cuts in appropriated spending, they should be encouraged to do so. The fiscal hole is so deep you have to start somewhere. But it is more likely that this exercise will prove to be nothing more than political posturing, not a serious attempt to control spending. Republicans have only 51 votes in the Senate. Getting 50 out of these 51 Senators to agree on a spending cut package will mean every program with a Republican patron will be protected. And that means almost nothing will get cut. It is telling that the only area of the budget that has been mentioned so far as a possible target is foreign aid, which is a tiny fraction of overall appropriated spending. The massive increases showered on scores of domestic programs in the omnibus bill are apparently off limits, even among Republicans.
CBO’s budget forecast signals that the country is now very close to the cliff’s edge. Any number of different events — such as a major international conflict — could trigger a debt crisis. The U.S. is currently able to borrow funds at preferential rates, but that may not always be the case. If interest rates were to rise sharply and suddenly, lawmakers could find themselves needing to raise taxes or cut spending drastically just to cover spiraling debt service payments.
Unfortunately, there seems to be little concern about this possibility among those in a position to do something about it — most notably the Republicans now controlling both Congress and the White House.
James C. Capretta is a RealClearPolicy Contributor and holds the Milton Friedman chair at the American Enterprise Institute.