A Grim Budget Outlook
Thursday, June 25, 2009 at 06:44 PM EDT
As President Obama has said, the budget really is something to lose sleep over.
Current deficits are enormous due to the weak economy, fiscal stimulus, and the costs of fighting the financial crisis. But the long-run outlook is even scarier, with Medicare, Medicaid, and Social Security pushing spending up much faster than tax revenues. The result is a tsunami of debt.
How much debt?
Well, the folks at the Congressional Budget Office have just released their latest projections of the long-run budget situation. Here is the key graph:
If current trends continue, CBO projects that the level of debt, relative to the size of our economy, will grow to unprecedented levels â€” and keep going. Within a few decades, the ratio of debt-to-GDP could surpass the peak of World War II.
That level of debt is not sustainable. As CBO notes:
Whatâ€™s the solution? Well, CBO canâ€™t be overly specific â€” its job is to present the facts, not draw policy conclusions â€” but hereâ€™s the advice:
In short, we need to address this problem as soon as possible. Waiting only lets the problem fester, increasing the risk to our economy.
Note: CBO considers two long-run scenarios. In the â€œextended-baseline scenario,â€ CBO takes the current law as given, even if thereâ€™s reason to believe that Congress will make changes. In the â€œalternative fiscal scenario,â€ CBO tries to capture what todayâ€™s underlying fiscal policy actually is; this combines current law with assumptions about changes to the law are likely. The second scenario leads to faster-growing debt because policymakers are assumed to do things that worsen the deficit: e.g., extend tax provisions that expire at the end of 2010 and prevent dramatic cuts to physician payment rates in Medicare.
This article originally appeared on Donald Marron.