The Congressional Budget Office Forecasts Much Larger Deficits

When the government is in the borrowing market place, it crowds out everyone else. Consequently, the cost to industry and consumers of borrowing money increases which, of course, increases the cost of doing business. And on and on…      

The nonpartisan Congressional Budget Office (CBO) has warned that deficits are set to explode in coming years. However, the agency's full budget forecast suggests the problem could be much worse than first described. 

The CBO, the official scorekeeper of all budget matters, predicts that the cumulative deficit over the next 10 years will be $1.5 trillion higher than the $7 trillion it forecast just five months ago. The culprits? The end of 2015 passed omnibus appropriations and highway transportation bills, and a more sluggish economic outlook. That projection, however, may be too conservative, based on some important caveats in the CBO’s full Budget and Economic Outlook.

Accordingly, the CBO forecast assumes that current laws and policies will remain unchanged over the time period it analyzes. However, the budget, taxes and spending will change, most likely in ways that balloon the deficit.

If the Congress continues its habit of ignoring mandated across-the-board spending cuts known as sequestration and of extending popular tax breaks set to expire, the projected $1.5 trillion increase in the cumulative deficit could end up doubling.

The Budget Control Act of 2011 (which put in place automatic across-the-board cuts through 2021 (called a sequester) in order to tame the deficit), isn't holding up as lawmakers are pushing for increased spending, including defense. Last year's bipartisan budget deal canceled most of those cuts and set higher discretionary spending caps for fiscal 2016 and 2017. If Congress avoids the automatic cuts each year starting in 2017, without other budget offsets to reduce spending, the cumulative deficit would increase by $897 billion over the decade.

The same risk applies to tax policy.  In the recently passed omnibus spending package, Congress made permanent - or otherwise extended many popular tax breaks such as accelerated depreciation and bonus depreciation allowances without cutting spending elsewhere to make up for the lost revenue. If that trend continues, deficits would balloon even further. If all tax breaks scheduled to expire by 2027 were permanently extended, revenues over the decade could decline by as much as $426 billion. 

Deficits would increase further, the report says, if Congress decides to make permanent the suspension of some unpopular health care taxes designed to finance President Barack Obama's signature health law. Specifically, Congress postponed for two years a medical device tax, suspended for one year a tax on health insurers, and postponed for two years the start of the so-called “Cadillac tax” on high-cost insurance plans. Permanently repealing those taxes would further reduce revenues by $256 billion between 2018 and 2026.

ENTITLEMENTS

The hike in health costs accentuated one of the greatest challenges Congress may face in trying to tame annual deficits in coming years, along with rising Social Security costs from an aging population and rising interest payments on the national debt. For the first time, federal spending on health care exceeded the cost of Social Security last year. Spending on all major health programs surged to $936 billion last year, an increase of 13 percent from fiscal 2014.  In contrast, the government spent $882 billion on Social Security, a 4 percent increase from the prior year.

Medicaid - The biggest driver in health cost increases was Medicaid, which grew by $48 billion, or 16 percent last year, after a 14 percent increase in 2014. The sharp cost spike reflected the implementation of President Obama's health care law, under which 30 states and the District of Columbia opted to expand Medicaid coverage. 

Exchanges - Subsidies for low-income people who bought insurance on the government-run marketplaces known as exchanges increased by $23 billion last year, to a total of $38 billion. Part of that increase can be explained by the fact that subsidies weren't offered until midway through fiscal 2014, making 2015 the first full year of implementation. 

The CBO cut by more than a third its estimate of how many people will buy health insurance this year on government-run exchanges.  In its new budget outlook, the CBO lowered its projection from 21 million enrollees to 13 million.  The new number includes 11 million who are forecast to buy subsidized coverage on the exchanges and 2 million who will buy unsubsidized coverage.  About 8 million people received subsidies for insurance last year, the CBO said. Subsidies and related spending are projected to increase by $18 billion this year, reaching a total of $56 billion.

Medicare - Medicare spending last year rose by $34 billion, or almost 7 percent, which the CBO called "the fastest rate of growth recorded for the program since 2009." It attributed the increase partly to a 3 percent hike in the number of Medicare beneficiaries and "an escalation in the number or cost of services furnished," particularly for prescription drugs. 

Social Security - And the explosion in costs for mandatory spending — namely Social Security, health care and interest on the debt — is only going to get worse.   Social Security spending will increase from 4.9 percent of gross domestic product (GDP) this year to 5.9 percent by 2026. Health spending will increase from 5.5 percent of GDP this year to 6.6 percent in 2026. And interest payments on the debt will increase from 1.4 percent of GDP this year to 3 percent in 2026, "the highest ratio since 1996," the report said.

PERMANENT TAX BREAKS

The CBO offered a mixed assessment about the package of extended tax breaks.  The omnibus package, which made permanent many popular tax breaks while extending others, is likely to boost growth in the short term but could dampen it later on.  The tax extensions "increased incentives for businesses to invest by changing the tax treatment of investment spending."  However, those tax changes will spur faster economic growth in 2016 and 2017 "but slightly slower growth in 2018."  And, by 2016, those tax cuts could end up actually harming economic growth because a larger cumulative deficit "would ultimately reduce private investment enough to more than offset any positive effects on output from other aspects of the legislation." Not a pretty picture.