Health Reform WK-EDGE Debt clouds loom near long-term budget forecast horizon
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Monday, August 1, 2016

Debt clouds loom near long-term budget forecast horizon

By Anthony H. Nguyen, J.D.

The U.S. federal debt, as a measure of percentage of gross domestic product (GDP), was projected to rise to 86 percent in a decade and 141 percent in 20 years if current tax and spending laws do not change. The latter debt-to-GDP ratio would exceed the historical peak experienced by the U.S. just after World War II, according to Congressional Budget Office (CBO) projections in its report, The 2016 Long-Term Budget Outlook. The CBO stressed that large debt poses major risks to the U.S. (CBO Report, July 12, 2016).

Although the budget deficit has declined each year since its peak of nearly 10 percent of GDP in 2009, it will likely rise in relation to the size of the economy in 2016. The CBO estimates that the deficit will be nearly 3 percent of GDP and by the end of the year the federal debt will be almost 75 percent of the GDP. Current law limits those deficit and debt levels through 2018.

The CBO provided illustrative examples of debt effect if current laws were changed. For instance, if lawmakers wanted to reduce debt in 2046 so that it equaled its average 39 percent of GDP over the past 50 years, the government would need to cut noninterest spending, increase revenues, or both by a total of 2.9 percent of GDP per year beginning in 2017. In the next decade, the change would amount to $6.7 trillion. To maintain the debt ratio to its current levels of 75 percent, the necessary increases or cuts would need to total 1.7 percent for the next decade. The longer the wait for changes to current law, the larger the changes would need to be.

Uncertainty. Social Security, major federal health care programs such as Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), and interest on previous government debts were major contributors to the projected deficit increases. As the baby-boom generation ages and life expectancy increases, the population of adults aged 65 or older will boost the number of beneficiaries relying upon Social Security and Medicare. If projections hold true, by the historical peak of debt-to-GDP ratio in 2046, projected spending for Social Security and Medicare for people 65 or older will account for almost half of all federal noninterest spending. In addition to the overall spending growth for Social Security and Medicare, health care costs per beneficiary are also projected to rise more quickly than GDP per person.

The CBO did note that its projections were uncertain because of four key factors: (1) labor force participation; (2) economic productivity; (3) federal debt interest rates; and (4) health care costs per person. Beyond these four factors, other factors, such as an economic depression, major war, or unexpected changes in fertility, immigration, or mortality rates, could affect the debt. Regardless of the uncertainty in the projections, the CBO concluded that debt as a percentage of GDP would be much greater than today if current laws remained.

Consequences. According to the CBO and its projections, the debt would (1) reduce national saving and income in the long term; (2) increase the government’s interest costs; (3) tie the government’s ability to respond to unforeseen events; and (4) increase the likelihood of a fiscal crisis. The CBO estimated that the fiscal policies driving the rising budget deficits have a different effect in the short term, when the policies boost overall demand for goods and services, and contrasted that to the lower output and employment in small or no deficit circumstances. The CBO noted that the demand, temporary as it is, cannot be sustained.

As the economy recovers from the previous recession, interest rates will rise, adding further pressure on the budget. With federal debt growing larger, national security could be compromised, as the government would have diminished ability to quickly address a financial crisis. Not only would the government have difficulties addressing a crisis, but the federal debt, itself could trigger a financial crisis, as a drop in investor confidence could result in market losses.

Federal health care programs. Outlays for the major health care programs, especially Medicare, as well as health insurance subsidies driven by the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), will impact federal spending; growth is projected at 5.5 percent of GDP in 2016 to 8.9 percent by 2046. Medicare spending per beneficiary, alone, is projected to grow faster than potential GDP per person over the next decade. In 2016, about 12 million people will be covered by insurance purchased through the marketplace under the ACA, with 10 million receiving subsidies. The outlays for the subsidies and related spending were about $38 billion.

As Medicare is funded generally by a mix of dedicated taxes, beneficiaries’ premiums, and money from the government’s general fund, the sources of funding have significantly changed since the program’s inception. The share of gross Medicare spending financed by dedicated taxes has declined from 67 percent in 2000 to an estimated 39 percent in 2016. The shift is expected to continue and by 2046, the CBO estimated that 21 percent of Medicare’s funding would be from its dedicated taxes. Medicare’s Hospital Insurance Trust Fund, used to measure sustainability of the program, will be exhausted by 2026. Once the trust fund is exhausted, total payments to health plans and providers for Part A services would be limited to revenues credited to the fund. Under this scenario, Part A services would have to be curtailed.

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