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CBO Says Entitlements Will Cause Ballooning Deficits

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While deficits will remain modest through 2018, the federal deficit will balloon to 4% of GDP by 2025 from 2.8% today, thanks in large part to entitlement programs, the Congressional Budget Office predicts.

Lawmakers and political strategists were quick to weigh in on CBO’s budget and economic outlook for the next 10 years, released Monday afternoon, with Senate Finance Committee Chairman Orrin Hatch, R-Utah, declaring that CBO’s estimates support reining in entitlement spending.

Hatch and other Republican lawmakers have vowed to also dismantle President Barack Obama’s Affordable Care Act. The CBO report notes that both CBO and the Joint Committee on Taxation currently estimate that the ACA’s coverage provisions will result in net costs to the federal government of $76 billion in 2015 and $1.350 trillion over the 2016–2025 period. 

Compared with the projection from last April, which spanned the 2015–2024 period, “the current projection represents a downward revision in the net costs of those provisions of $101 billion over those 10 years, or a reduction of about 7%,” the CBO report says. Compared with the projection made by CBO and JCT in March 2010, just before the ACA was enacted, “the current estimate represents a downward revision in the net costs of those provisions of $139 billion—or 20%—for the five-year period ending in 2019, the last year of the 10-year budget window used in that original estimate,” the report says.

CBO notes that while the economy will “expand at a solid pace” in 2015 and for the next few years with the unemployment rate projected to fall a bit further, beyond 2017, CBO projects that real (inflation-adjusted) gross domestic product will grow at a rate that is “notably less than the average growth during the 1980s and 1990s.”

If current laws stay in place, CBO says that spending will grow faster than the economy for Social Security and the major health care programs, including Medicare, Medicaid and subsidies offered through insurance exchanges.

Hatch is pressing for five entitlement reforms he calls bipartisan: raising the Medicare eligibility age; putting limits on Medigap plans; simplifying Medicare beneficiary cost-sharing; boosting private-sector competition with Medicare; and capping Medicaid per capita spending.  

Mandatory spending other than that for Social Security and health care, as well as both defense and nondefense discretionary spending, will shrink relative to the size of the economy, the report states.

CBO estimates in its report that the deficit for this fiscal year will amount to $468 billion, or 2.6% of GDP, slightly less than the 2014 deficit of 483 billion, or 2.8% of GDP. This year’s deficit is projected to be the smallest relative to the nation’s output since 2007 but close to the 2.7% that deficits have averaged over the past 50 years, the report states.

CBO says that deficits in its “baseline projections remain roughly stable as a percentage of GDP through 2018,” with the deficit in 2025 projected to be $1.1 trillion, or 4% of GDP. Cumulative deficits over the 20162025 period are projected to total $7.6 trillion.

Greg Valliere, chief political strategist for Potomac Research, notes in his Tuesday commentary that CBO’s prediction of $468 billion “in red ink strikes us as too high; something in the $425 billion neighborhood seems likely if the economy continues to surge. That would take the deficit to under 2.5% of GDP, where it will stay for the next two or three years.”

In the short run, Valliere writes, “the good news on deficits will reinforce a movement to replicate the two-year budget deal” hammered out by House Ways and Means Committee Chairman Rep. Paul Ryan, R-Wis., and Rep. Patty Murray, D-Wash., “15 months ago that loosened the rigid budget sequester.”

Valliere predicts a “new deal — perhaps in conjunction with a debt ceiling extension late this summer — probably would waive meat-ax sequester caps for defense and perhaps allow domestic spending to stay roughly flat.”

CBO projects that spending will rise from a little more than 20% of GDP this year to a little more than 22% in 2025 due to four key factors: retirement of the baby-boom generation; expansion of federal subsidies for health insurance; increasing health care costs per beneficiary, and rising interest rates on federal debt. Hatch said in a statement that “CBO’s report is clear — entitlement spending, if not reformed, will drive our deficits and debt to unsustainable levels in the very near future, and unsustainable entitlement spending will continue to crowd out spending in other areas.”

Leaders in Washington, Hatch said, “must stop turning a blind eye to such facts and instead work together to resolve this crisis. That means taking swift action to implement systematic and meaningful reform that will strengthen the nation’s safety-net programs and guarantee their solvency for our children and grandchildren.”

But Valliere notes that while he and “virtually all budget experts” agree with CBO that entitlement growth will soar by the end of this decade, he doesn’t see entitlement reform taking place anytime soon. “Unfortunately, there’s no likelihood of action on this front — there’s no angry message from the markets, not with the Treasury 10-year bond yield at 1.8%, not with the stock market still relatively strong,” Valliere says. “Many Republicans want to curb entitlement growth — at least Social Security COLA growth — but in private they acknowledge this could be radioactive in the 2016 campaign.”

— Check out Census Data Understates Retirement Income of Wealthy on ThinkAdvisor.

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