The CBO Lays Bare Washington’s Financial Mess

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Washington’s financial prospects are bleak. The official Congressional Budget Office (CBO) forecasts that federal spending will continue to outpace revenue by a wide margin for years to come. The historically large annual deficit would add to the country’s already massive accumulation of public debt so that by 2032 the public debt outstanding would rise to 110% of the country’s gross domestic product (GDP) and then rise to 185% by the middle Will go century, more than at any time in history, including World War II. Entitlements are at the root of the problem.

Here’s what the CBO reveals about Washington’s finances in broad strokes. Its economists predict that federal revenues from all sources will grow alongside the economy, which averages a touch of 18% of GDP each year, close to historical precedent. The expense side of the ledger is less stable. The CBO projects that federal outlays will increase from some 23.8% of the economy this year to 25.8% by the middle of 2030, and then climb to some 28.9% by mid-century, which is an increase of 5.1 percent.

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It is the growth of entitlements – less programs like Social Security, Medicare, Medicaid, and the like – that lies at the root of the relative increase in spending and the problems of budgeting in general. These spending lines will grow from an estimated 10.
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8% of GDP this year to 13.7% in the middle of 2030 and 14.9% by mid-century, according to the CBO. The 4.1 percentage point increase in the relative size of eligible spending amounts is more than four-fifths of the relative increase in all expenses. The remaining overall increase comes from Washington’s need to pay interest on the increased debt load, which is a result of past increases in eligibility spending.

The CBO’s forecast differs slightly from the previous precedent. For decades federal spending has grown almost entirely due to a relative increase in entitlement spending as a part of the economy. Between 1970 and this year, total federal spending has risen from 18.7% of the nation’s GDP to the CBO’s 2022 estimate of 23.8%. This increase has come even as the relative level of defense spending has fallen from 7.8% of GDP in 1970 to about 3.5% today. It has been an increase in entitlement spending that has eroded potential budget relief due to declining Pentagon demands. Entitlements have increased from 7.6% of GDP in 1970 to 10.8% currently.

Although the CBO has basically detailed historical trends in the future, the picture it paints may be too optimistic. For example, it assumes that defense spending will remain stable at around 3.5% of GDP. It may seem conservative to remove the previous budgetary relief given by the relative decline in such spending from the outlook, except that developing geopolitical pressures are likely to increase the relative size of defense outlays. Even on the entitlements, there are signs of budgetary optimism. Although the CBO’s projections slightly outpace the historical pace of increase in eligibility, there is reason to seek higher spending. Only three views provide perspective.

The government has already decided to continue subsidies under the Affordable Care Act even thought they were set to end. These will accumulate over time to increase the share of the budget and the share of GDP absorbed by the entitlements. President Biden plans to have student loans forgiven. The exact amount will, of course, depend on how much the government decides to waive and what income tests it imposes on recipients, but it certainly points to growth and not relative rights over the economy. Burden reduction, especially since it will set an example for future generations of indebted collegians.

More important still is the potential effect of aging in the country’s population. With the ongoing retirement of the giant baby-boom generation, the number of dependent retirees will continue to grow. For example, in 1970, some 10% of the population was 65 years of age or older. By 2019, this figure had increased to 16%. The Census Bureau estimates that this figure will rise to 21% by the middle of 2030 and to 22 by the middle of the century. This large proportion of older people can’t help but increase demands for Social Security and Medicare and other federal services, accelerating the relative increase in eligibility spending. CBO estimates try to account for this trend but may not be sufficient.

That doesn’t mean that entitlement, already on some two-thirds or more of the federal budget, is the wrong way for Washington to spend. The trends, historical and probable, reflect the preferences voted on by Congress of both parties and signed into law by Democratic and Republican presidents alike. Perhaps this is how the nation should allocate the output of its goods and services. This is a political decision.

Economics can only indicate that those decisions denounced federal finances for deficits and ever-increasing debt burdens and that they will continue to do so until Washington takes one of three difficult steps: 1) Eligibility achieves control over their rapid growth rate, at least sufficient to moderate; 2) accommodates the growing demand for entitlements by sacrificing other government services, as was done with defense in the past but no longer seems possible in today’s geopolitics; 3) Tells voters that they have to pay more in taxes so that their representatives don’t have to make these difficult decisions. As the CBO has clarified, although indirectly, it is the only way to avoid the debt burden that many already see as incapable.

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