Skip to main content

NEW YORK (MainStreet) – The Congressional Budget Office (CBO) release of the 2013 Long-Term Budget Outlook last month does not bode well for those who want to see decreasing deficits. The CBO projects spending for federal healthcare programs will "rise substantially" in relation to the Gross Domestic Product (GDP)."

The CBO predicts that budget deficits will decline during the next few years. After this initial decline, though, the organization calculates there will be an increase because of greater interest expense and more spending for entitlement programs. The CBO says Social Security, Medicare, Medicaid, the Children's Health Insurance Program (CHIP) and the health insurance exchanges subsidies beginning in 2014 will drive the additional spending.

Specifically, CBO predicts that publicly held federal debt would decline to 68% of GDP by 2018. This is because of economic policies enacted during the 2007 to 2009 recession that have caused the deficit to be the "smallest size since 2008," which is roughly 4% of GDP. Debt-to-GDP ratio peaked in 2009 at 10%.

If these policies remain in effect the deficit is predicted to shrink to 2% of GDP by 2015. This would lead to federal debt, held by the public, declining to 68% of GDP by 2018. But then the deficits would rebound, presuming current law remains the same, because interest costs will increase as interest rates rise, and there will be growing spending because of growing Medicare populations, rising healthcare costs and emerging subsidies for health insurance under the Affordable Care Act.

By 2023, the CBO says, "the budget deficit would grow to almost 3.5% of GDP under current law, and federal debt held by the public would equal 71% of GDP and would be on an upward trajectory."

The CBO further states that the "gap between federal spending and revenues would widen steadily after 2015 under the assumptions of the extended baseline. By 2038, the deficit would be 6.5% of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 100% of GDP, more than in any year except 1945 and 1946. With such large deficits, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable."

This would have a cascading effect in the economy. Investors would become apprehensive about the federal government's creditworthiness. They would wonder if the government would be unable or even unwilling to repay its debt.

Those in the financial industry and those who advise policymakers see the CBO report as a harbinger. The consensus is there is financial trouble on the horizon.

Joe Daverso, a financial advisor in Mount Laurel, New Jersey believes the CBO estimates is a stark reminder that the federal government needs to address entitlement reform very soon. He thinks that with the growth in entitlement spending and the potential for rising interest payments on the debt, there will not be much left in discretionary spending for Democrats or Republicans in future budgets.

"Politically, the least difficult changes to social security will be to the CPI formula and a change in retirement age for younger workers," said Daverso. "Younger workers have low expectations as far as social security being there for them and they just want to know that a solvent system will be there for them in some form."

Scroll to Continue

TheStreet Recommends

His opinion is shared by those in highly regarded think tanks that span the ideological continuum.

Alison Acosta Fraser, a senior fellow and director of Government Finance Programs for the Heritage Foundation in Washington, D.C., thinks that while much has been made about the recent improvement in the deficit it is a chimera.

The CBO report, she feels, shows that the spending growth in the major entitlement programs will swamp the spending reductions from the Budget Control Act's spending caps and sequester cuts. These programs will swell total spending soar surpassing tax revenues and publicly held debt will grow to a level only seen briefly following World War II. This will occur even after the major tax increase from January's fiscal cliff deal. She pointed out that the CBO even notes the harm which would stem from higher taxes – in particular from increasing marginal tax rates, in which case spending, debt and deficits would be even worse.

"Entitlement programs - Social Security, Medicare, Medicaid - are the big worry," Acosta Fraser said. "They are biggest part of the budget and are projected to grow to huge levels." Today they comprise 45% of all federal spending, and ten plus years ago it was just 25%. But by 2023, half of all spending will be automatically directed toward these entitlements.

"Of particular note in this report is the space devoted to the harmful effects of running such huge levels of debt, including the massive increases in interest payments required to service that growing debt, the drag this would force on the economy, dramatically higher interest rates and the increased risk of a fiscal and financial crisis," she added.

Acosta Fraser's colleague at Heritage, Romina Boccia, focuses on federal spending and the national debt at the Roe Institute for Economic Policy Studies.

"Even though there is a short-term reduction in the deficit as a percentage of GDP through 2015, this reduction is fleeting," Boccia said. "Spending growth is projected to accelerate as Obamacare takes off and more and more Baby Boomers begin drawing benefits from Social Security, Medicare and Medicaid."

She also confirmed what the CBO said inasmuch as the cost of servicing the debt is expected to rise sharply.

"Congress needs to cut spending and reform entitlement programs—and do so now," Boccia said.

--Written by Michael P. Tremoglie for MainStreet