In Case You Missed It: We’re Still Heading Towards a Debt Crisis

These past few weeks have seen their share of crisis and controversy in the nation’s capital. But, yesterday’s news from the CBO is significant and should not be missed. It will play a major role in the debt ceiling and budget debates that will highlight the next two months.

Yesterday, the non-partisan Congressional Budget Office (CBO) released its annual report on the long-term budget projections for the federal government. Their conclusion: despite the sequestration cuts and tax hikes on the rich from last year, the United States is still on a path towards a debt crisis because we have not reigned in our spending on entitlements.

According to the CBO, “[t]he $2.1 trillion in spending cuts passed by Congress in 2011 won’t curb the growth of entitlements that poses a fiscal-crisis risk in the next 25 years.” (Bloomberg). Consequently, by 2038, the public debt will be equal to the total output of the U.S. economy. And as The New York Times described it, “lawmakers have been cutting the wrong kind of federal spending as they try to avoid the unsustainable buildup of debt that is projected in the coming decades.”

The Administration and its supporters will tout that the federal deficit is at the lowest level since 2008 which is due to a (relatively) improving economy and the sequestration. But, as the report states, “[u]nless substantial changes are made to the major health-care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in future than they have in the past.” In other words, without entitlement reform, the status quo is unsustainable.

While the CBO report is long and wonky, its logic is relatively simple. The sequestration cut $1.2 trillion in mostly discretionary and defense spending – but didn’t touch entitlements. And entitlements – along with the interest on the debt we pay — make up over half of all spending. Consider the breakdown of federal spending:

• About 23% of spending goes to healthcare, such as Medicaid and Medicare. This is increasing faster than any other part of the federal budget.

• About 22% is spent on social security. Funded by the payroll tax, there were surpluses in the social security trust fund for many years. However, given the baby boomers and how people are living longer, the trust fund is will be empty by 2033.

• An alarming 6% is spent on paying interest on the debt. This will only increase in the future as our country owes more and interest rates rise from their historic lows.

• About 20% goes to Defense.

As a result, without touching the biggest drivers of the debt – entitlements – Washington cannot take the country off its current path to fiscal insolvency. Fortunately, a debt crisis won’t happen tomorrow – so we can drive down the long-term debt by reforming future entitlement spending today. Still, this requires tough decisions that the majority of Congress and the President have been unwilling to make.

CBO Table

Now, what would happen if lawmakers continue to do nothing? One result of a debt crisis would be, according to the CBO, “very high interest rates” on government bonds as it gets more risky to invest in the U.S. This would result in a dramatic dumping of U.S. bonds in favor of something more safe (the rmb anyone?) and making it more difficult to borrow money.

The fiscal situation also directly affects our national security and ability to project power around the world. If the U.S. cannot influence the world to be more free, democratic, and capitalistic, then our rivals will fill that void and remake the world in a way that is abhorrent to our values.

The CBO report also gives us a chance to reflect on what type of society we want for the future. If adjustments are not made to entitlements, major, immediate cuts will be forced on us down the road. This is happening in Detroit as many city workers will likely see their pensions decimated. Moreover, the spending on entitlements and interest on debt will soon crowd out essential investments, such as Defense, roads and infrastructure, research at the National Institute of Health, and NASA. This jeopardizes the very notion of American exceptionalism.

During the 2012 campaign, Vice President Biden liked to say: “Show me your budget, and I’ll tell you what you value.” If the federal budget does not contain serious entitlement reform, then it’s clear that they value something other than the American people and our country’s future.

 

 

This Post Has One Comment

  1. Lawrence Kress

    As long as there are deadbeats that refuse to get a job and we continue to enable them, the expansion of entitlements and the federal deficit will never stop.

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