Earlier this week, the Congressional Budget Office (CBO) released its latest look at the U.S. federal budget over the very long-term, all the way out to 2089. And although budget projections, especially ones that go out that far, are inherently uncertain, they nevertheless provide important information about the most likely effects of the current budgetary path. The information that the CBO provided can be interpreted in two, equally important, equally legitimate, and completely compatible ways. First, it would be perfectly accurate to look at this week's projections and be encouraged by how much progress has been made toward a more secure fiscal future, especially compared to the situation just a few years ago. But it would also be perfectly reasonable to look at this week's projections and see an unsustainable path that, without action, will lead to a fiscal danger zone that the country has never before experienced. These two interpretations are not mutually exclusive, and in fact, both are important to understanding the choices facing the nation.
First and foremost, this week’s report confirms recent CBO projections that, over the medium-term the federal budget outlook is quite stable. Deficits are expected to remain at relatively manageable levels through the end of this decade, and debt is projected to remain roughly constant, as a share of gross domestic product. But over the longer-term, deficits are expected to rise again to unsustainable levels, and debt is projected to grow to the size of the entire U.S. economy by 2036.
This week’s report actually represents incredible improvement from the most widely-used and often-cited projections from four years ago. In 2010, the “Simpson-Bowles” fiscal commission cited a CBO report that showed debt reaching 194 percent of GDP by 2036, nearly twice as high as current projections. That enormous improvement has been driven by several main factors. First, the 2010 projections cited by most budget analysts assumed that all of the 2001 and 2003 tax cuts—commonly known as the Bush Tax Cuts—would be extended permanently, including those that benefited just the very richest households. Instead, Congress allowed some of those tax cuts to expire for households making more than $450,000 ($400,000 for individuals). Second, the United States has recently enjoyed a dramatic and consequential slowdown in the rising cost of health care. In fact, since 2010, the CBO has reduced its ten-year projections of federal spending on federal health care programs for the period from 2011-2020 by more than $1 trillion. Thirdly, a series of spending bills that capped and otherwise limited annual appropriations also served to significantly reduce CBO’s expectations of future federal spending in that category. Together, these three factors combined to produce an enormous and undeniable improvement in the long-term fiscal outlook.
Just as undeniable, however, is that despite the recent improvement, this week’s projections still showed the country walking a very troubling path. Historically, federal debt held by the public peaked in 1946, just after the conclusion of World War II, at 106 percent of GDP. CBO’s current projections have the U.S. surpassing that record by 2040, on the way to unprecedented—and unsustainable—levels of debt in the subsequent years and decades.
Not only is it possible to interpret the latest budget projections in these two ways, it is absolutely critical to do so. To continue this steady progress on the long-term fiscal outlook, policymakers need to understand the scope of the problem and build on recent successes. That means responsible reforms to further slow the growth of health care costs. It means a commitment to a fairer, more efficient and responsible tax code no longer littered with special tax breaks that benefit the very wealthy. And it means building on recent bipartisan efforts such as the Bipartisan Budget Act of 2013 that made tough choices on both sides of the ledger while also accommodating critical investments in jobs, education, research and infrastructure. It is in the recognition of what has worked so far that much of the solution to the remaining challenges can be found.