Entitlement spending needs urgent reform
This op-ed appeared April 22, 2018 in the Pioneer Press.
Early April saw one of the biggest news stories of the year, though you’d never know it if you watched the news. While networks worked themselves into a frenzy over the latest goings on in the Trump administration, the Congressional Budget Office released its Budget and Economic Outlook for 2018 to 2028. It made for scary reading.
Based on current laws, the CBO forecasts that the federal budget deficit will grow “substantially” over the next few years, from 3.5 percent of GDP in 2017 to 5.4 percent in 2022. After 2023, it is projected to stabilize in relation to the size of the economy, “though at a level high by historical standards,” between 4.6 percent and 5.2 percent from 2023 to 2028, compared with an average annual deficit of 2.9 percent over the last 50 years. These deficits are going to increase federal government debt. In the past decade, this has doubled to 78 percent of Gross Domestic Product (GDP), and the CBO forecasts this to rise to 96 percent of GDP by 2028, the highest level since 1946.
And this is the rosy scenario. It is based on “current law,” which assumes substantial income tax increases in 2025, as individual tax cuts expire, and spending cuts. If these do not happen, then the deficit would rise to 7.1 percent of GDP in 2028 and federal debt would hit 105 percent of GDP that year, “an amount that has been exceeded only one time in the nation’s history.”
Because of the drastic changes to the federal fiscal framework recently, the CBO has not had the time to run the projections out to 30 years as they are required to do. When they did so last year, they forecast that federal debt would reach 150 percent of GDP in 2047. With the increase in projected deficits, this figure will be even higher when the estimates are finally produced.
The CBO lists a number of ways that this explosion of debt could pose a threat to the U.S. economy. For one, interest payments on that debt will eat up an ever-growing share of federal government spending, especially with interest rates forecast to rise in coming years. For another, this federal borrowing will reduce total saving in the economy, which will, in turn, reduce the nation’s capital stock and lead to lower productivity and incomes.
What is causing this deluge of red ink?
CBO data show that it is not tax cuts. In fact, as a share of GDP, tax revenues are currently 17.3 percent of GDP and the CBO forecasts this to rise to 18.5 percent in 2028. Some have touted a cut in corporate tax rates as a cause of the increased deficits and debt. This is absurd. The tax’s revenue amounted to just 1.5 percent of GDP in 2017 and the CBO forecasts that it will still be 1.5 percent in 2028.
The culprit is higher spending. The CBO projects that this will rise from 20.8 percent of GDP now to 23.6 percent in 2028. But it is not “discretionary” spending that will be driving this. From 2018 to 2028, the CBO forecasts that discretionary spending will fall from 6.4 percent of GDP to 5.4 percent. Discretionary defense spending is projected to fall from 3.1 percent of GDP in 2018 to 2.6 percent in 2028 and non-defense spending to fall from 3.3 percent of GDP to 2.8 percent. Indeed, this section of the budget is projected to remain balanced at around 12 percent of GDP.
The CBO is unequivocal that this increase in spending is being driven by out-of-control entitlement spending. Between 2018 and 2028, spending on Social Security, Medicaid and Medicare is projected to rise from 12.7 percent of GDP to 15.2 percent. Social Security spending is forecast to increase from 4.9 percent of GDP to 6.0 percent, Medicare from 3.5 percent of GDP to 5.1 percent and Medicaid from 1.9 percent of GDP to 2.2 percent.
Worryingly, the fiscal outlook has deteriorated while the CBO’s forecast for economic growth has improved. To avoid the economic horror scenario of spiraling federal debt, substantial entitlement reforms are necessary. Indeed, it will be hard to give the Trump administration a pass grade if it takes no action on this front. Without it, the nation has little hope of avoiding a fiscal crisis. Not that you’d know it from the evening news.
John Phelan is an economist at the Center of the American Experiment, a conservative think tank in Golden Valley.