The 2011 Federal Budget: You Ain’t Seen Nothin’ Yet

Filed Under (U.S. Fiscal Policy) by Jeffrey Brown on Feb 2, 2010

Hollywood is abuzz today with the news of the 2010 Academy Award nominations.  If there were a category for “Most Frightening,” surely the newly released 2011 federal budget would be the odds-on favorite.  Released yesterday, the budget contains some difficult-to-swallow news about the difficult choices ahead of us.  

 Let me just highlight some of the more frightening numbers – all of which can be found in the proposed budget.  

  • Even with the President’s proposed tax increases and spending cuts, the projected single-year deficit never falls below $706 billion (that, in year 2014).  Indeed, it starts with a projected FY 2011 deficit of $1.566 trillion, and ends in 2020 with a $1 trillion deficit.
  • The debt held by the public is projected to roughly double over the next decade, from $9.3 trillion in 2010 to $18.57 trillion by 2020.
  • Of course, the economy is growing over this time (at least we all hope), so more meaningful numbers are relative to GDP.
    • The 2011 deficit is projected to be 8.3% of GDP
    • The debt held by the public will rise from 63.6% of GDP to 77.2% of GDP over the next decade.

 Of course, this may be a best-case scenario (in terms of deficits) because it assumes the President gets what he wants, including (as reported in today’s Wall Street Journal):

  • $175 billion rise in personal income taxes
  • $117 billion rise in corporate income taxes

 I’ve written previously about why deficits matter, primarily because they serve as a drag on long-term economic growth.  President Obama’s very talented budget director Peter Orszag understands this as well as anyone.

 But as bad as things look over the next few years, we need to recognize that the really long-term budget forecasts are far worse.  

 It is no secret that the biggest drivers of increased government spending over the long-run are the “Big Three” (meaning entitlements, not the auto-makers).  Growth in spending on Medicare, Medicaid and Social Security are projected to outpace overall economic growth for as far as the eye can see.  Unless these programs undergo structural change to rein in costs, the implications for our economy are enormous.

Consider this: for most of the last 50 years, government spending has stood around 20% of GDP (yes, it is higher now, but I am taking a longer-term view).  According to the Congressional Budget Office, by the year 2035 (about the time today’s newborn children are starting their own households, when today’s college graduates are in their middle ages, and when today’s middle-agers are set to retire), spending on Medicare, Medicaid and Social Security will be 16% of GDP all by themselves.  By 2080 (when today’s newborns are retiring), these programs will comprise nearly a quarter of GDP – a higher fraction than ALL government spending today.  So unless we change these programs, the rest of the government would need to cease operation, tax rates will have to skyrocket, or we are going to watch our debt grow to unprecedented levels relative to GDP.

 

The main drivers of these trends are rising per capita health care costs and population aging.  We have so far been woefully unsuccessful at dealing with the first, and we may not want to do anything about the second (after all, most of us like living longer).

 

In short, as bad as the short-term budget outlook is, the longer-term budget outlook is even worse. 

 

Sorry to be so pessimistic … but sometimes the facts speak for themselves.