The staggering imbalance of the federal budget

​Shortly before Americans went off to grill their burgers and gaze at fireworks for the Fourth of July holiday, the Congressional Budget Office (CBO), Congress’s nonpartisan team of fiscal analysts, issued a dire warning:
 
“As deficits accumulate in CBO’s baseline, debt held by the public rises from 77 percent of GDP ($15 trillion) at the end of 2017 to 91 percent of GDP ($26 trillion) by 2027... At that level, debt held by the public would be the largest since 1947 and more than twice the average over the past five decades in relation to GDP... Three decades from now… debt held by the public is projected to be nearly twice as high, relative to GDP, as it is this year--a higher percentage than any previously recorded in the nation’s history.” Congressional Budget Office, “An Update to the Budget and Economic Outlook: 2017 to 2027”, June 2017 (Emphasis added)
 
 If current laws governing spending and taxes remain the same, federal deficits and the debt will increase considerably in the coming years and decades. Deficits will grow from an estimated $693 billion in fiscal year 2017 to nearly $1.5 trillion by 2027. Relative to the size of the economy, the 2017 deficit will be 3.6 percent, and the 2027 deficit will be 5.2 percent, of gross domestic product (GDP).
 
The numbers are more troubling the further into the future CBO goes. In March, CBO predicted a 2047 deficit that would be 9.8 percent of GDP, with federal debt held by the public reaching 150 percent of GDP (compare that to 77 percent in 2017).
 
There are those who will quibble with the accuracy of CBO’s estimates. But the precise numbers are far less important than the indisputable fact that they show current fiscal policies failing to be sustainable in the long-term.
 
CBO, in its report, describes the ramifications of increased debt:

• Increased federal spending on interest would occur, crowding out other spending (net interest payments by 2027 would be over $800 billion – larger than CBO’s estimate of defense spending for that year).
• Increased federal borrowing would reduce total savings, reducing productivity and wages.
• Increased pressures on the budget would make it harder to use tax and spending policies to counter economic downturns or address urgent national needs.
• Increased chance of a financial crisis resulting from greater risk in the financial markets and the possibility of interest rates rising “suddenly and sharply.”

 
What can be done to reverse this trend before it’s too late? While CBO does not make policy recommendations, in December 2016 it provided Congress with a list of 115 options to reduce spending or increase revenues. Many of these options are worthy of consideration, although many are also politically difficult.
 
There are three broad areas that shape the budget--
 
Entitlements such as Social Security, Medicare, and Medicaid are major drivers of increased deficits and debt. Medicare, for example, rises from $701 billion in 2017 to nearly $1.4 trillion in 2027, according to CBO’s estimates. Significant deficit reduction is unlikely if these programs are left untouched. But it is extremely difficult, politically, to reverse course on the benefits promised by these programs.
 
Discretionary spending that funds the day-to-day operations of government could be reduced, but this spending has already been cut over the past six years. The cuts have hit bone in many cases, and many in Congress, on both sides of the aisle, reject the significant additional nondefense cuts called for in the Trump budget and strongly support large increases in the defense budget.
 
Revenues are the other side of the deficit equation. But tax increases are abhorrent to politicians, especially when they recall what happened to Bush 41 when he went back on his “no new taxes” pledge.
 
But doing nothing is not an option. Getting control over the deficit and debt requires a willingness to make hard choices. Nothing should be off the table.
 
Difficult decisions need to be made before the budget explodes like a crate of Fourth of July fireworks.