The Congressional Budget Office's annual long-term budget report shows that without any changes in the law, government debt will peak this year, then slowly decline for two decades. Despite this finding, many media outlets are emphasizing a “dire” outlook, while downplaying or ignoring CBO's finding that there is a path to a stable budget that includes maintaining the social safety net.
CBO Report Looks At Two Possibilities For Budget's Future
CBO Presents “Two Scenarios That Embody Different Assumptions About Future Policies Governing Federal Revenues And Spending.” From the Congressional Budget Office's “2012 Long-Term Budget Outlook” :
In this report, CBO presents the long-term budget outlook under two scenarios that embody different assumptions about future policies governing federal revenues and spending:
- The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits.
- The extended alternative fiscal scenario, which incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified, thus maintaining what some analysts might consider “current policies,” as opposed to current laws.
Those scenarios span a wide range of possible policy choices, and neither represents a prediction by CBO of what policies will be in effect during the next several decades. Because budget projections of this type are inherently uncertain and become more so as they extend farther into the future, the report focuses on the next 25 years rather than a longer horizon. [CBO, June 2012]
Impacts Of Different Scenarios On Debt Diverge Drastically. From the CBO report:
[CBO, June 2012]
Economist: CBO Shows That We Can Maintain Medicare, Medicaid, And Social Security While Reducing Debt
Bernstein: CBO Shows Debt Can Be Put On “Slow Glide Path” That Keeps “Medicare, Medicaid, And Social Security As We Know Them Today.” From a blog post written by Jared Bernstein, a former Obama administration economist and a senior fellow at the Center on Budget and Policy Priorities:
To hear everyone from the WaPo editorial page to Bowles/Simpson to all the R's and many of the D's, there's an entitlement crunch, crisis, death spiral, or whatever...waiting for us out there in the future if we fail to muster the steely-eyed courage to face it. And “face it” invariably means cutting benefits, privatizing, voucherizing, raising the retirement age, means testing...basically, fixing them by breaking them.
Under [the lower debt] scenario, which in fact happens to be current law (meaning all the Bush tax cuts expire, for example), debt stabilizes as a share of the economy in a few years and then starts down a slow glide path. And Medicare, Medicaid, and Social Security as we know them today are all in that bottom line.
Under that scenario taxes go up and spending is restrained compared to the alternative baseline. Some of the assumptions -- like we allow Medicare payments to doctors to fall sharply or all the tax cuts permanently expire next Jan -- are wholly unrealistic. But there are unrealistic assumptions under the other scenario too (the federal gov't is not going to be spending 36% of GDP by 2037 (the historical average is about 21%)).
But generally speaking, and with some tweaks, there's no reason why something like that bottom line's baseline couldn't prevail. The Bush tax cuts would all have to eventually sunset, and we'd need to continue -- and ramp up -- what looks like early progress on slowing the growth of health care spending. [On the Economy, 6/5/12]
Meanwhile, Media Push A “Dire” And “Grim” Outlook, Downplaying Sustainable Scenario
LA Times: Debt “Projected to Hit Dangerously High Levels By September.” From the Los Angeles Times:
The Congressional Budget Office warned the nation's public debt load is projected to hit dangerously high levels by September -- roughly 70% of the nation's gross domestic product -- a milestone not seen since World War II, underscoring the crucial decisions facing Washington and the candidates in this presidential election year.
The report Tuesday from the nonpartisan budget office throws into stark terms the challenges facing the U.S. economy and the dangers of congressional inaction. Allowing debt levels of that size to grow would ripple across the economy in years to come, slashing gross domestic product and threatening a fiscal crisis.
At the same time, the CBO has warned that any attempt by politicians in Washington to quickly bring the budget into balance with new taxes or spending cuts carries its own risks: Such sudden moves, as lawmakers are considering for the end of this year, could throw the economy into a recession in 2013, the budget office said last month.
If Washington does nothing, current policies already set to take effect by the end of the year would begin to bend the debt curve downward -- as low tax rates put in place during the Bush administration are set to expire, boosting revenue, and spending cuts approved by Congress are scheduled to begin in early January, reducing expenditures.
However, that sharp jolt would curtail GDP, slowing growth to just 0.5% for the 2013 calendar year, and likely throw the country into another recession. [Los Angeles Times, 6/5/12]
AFP: CBO Reported That “US Debt Is On Track To Double The Size Of The Entire Economy In The Next 25 Years.” From an AFP article headlined “Congressional study warns of dire US debt outlook” :
US debt is on track to double the size of the entire economy in the next 25 years, the non-partisan Congressional Budget Office reported Tuesday in its grim view of America's fiscal future.
The CBO said that under present policy, in which current tax rates are upheld and lawmakers do not curb entitlements, the portion of national debt held by the public would soar from 70 percent of GDP as forecast for the end of 2012 to 100 percent of GDP in just over a decade.
The report maps out two separate trajectories, including the extended baseline scenario in which federal debt would gradually decline over the next quarter century to 53 percent of GDP, thanks to relatively high revenue levels and lower spending on non-health care programs. [AFP, 6/5/12]
WSJ's MarketWatch: “CBO Paints Grim Long-Term Debt Picture.” In an article headlined “CBO paints grim long-term debt picture,” MarketWatch reported debt would reach “almost 200% of gross domestic product” before mentioning the current-law scenario in the final paragraphs:
The U.S. debt will exceed the size of the nation's economy in 25 years if the federal government doesn't chart a “sustainable fiscal course,” the Congressional Budget Office warned in a new estimate on Tuesday.
In its 2012 long-term budget outlook, the nonpartisan CBO said that extending current tax rates and rising health-care costs would push the debt to almost 200% of gross domestic product in 2037. That is under the CBO's scenario that maintains current policies.
The CBO's so-called extended baseline scenario sees debt falling to 53% of GDP in 2037, as revenues increase to historically high levels and spending on programs other than healthcare and Social Security falls. [MarketWatch, 6/5/12]