Presentations to the National Commission on Fiscal Responsibility and Reform

May 18, 2010

At the request of Congressional budget leaders, CBO is providing basic budget and economic analysis and estimates for the National Commission on Fiscal Responsibility and Reform. That bipartisan commission is composed of 18 members, six appointed by the President and the other 12, all Members of Congress, appointed by the Congressional leaders of both parties. The commission is charged with formulating recommendations designed to balance the federal budget, excluding interest payments on the debt, by 2015, and to meaningfully improve the nations long-run fiscal outlook. The commission is to vote on a final report by December 1, 2010.

The Chairmen and Ranking Republican Members of the House and Senate Budget Committees all serve as commission members. In order to ensure that the commission has an objective, nonpartisan source of budget information for use in its deliberations, the two Budget Committee ChairmenRepresentative John M. Spratt, Jr. and Senator Kent Conradand the two Ranking MembersRepresentative Paul Ryan and Senator Judd Greggformally asked CBO to provide the commission with projections regarding the current budget outlook, as well as estimates and information that may be needed to assess the impact of alternative policy options. In order to assist the Members of Congress in their deliberations on the commission, we have agreed to do so to the extent feasible while meeting our other responsibilities to the Congress.

As part of that effort, CBOs Assistant Director for Budget Analysis, Peter Fontaine, recently briefed some of the members of the commission on historical trends and CBOs projections related to discretionary spending (that is, spending that is governed by the annual appropriation process). Deputy Director Robert Sunshine briefed commission members on historical trends and CBOs projections related to mandatory spending (that is, spending for programs like Social Security and Medicare that are not governed by the appropriation process ).

In CBOs baseline projections, which are intended to reflect current laws and policies, new funding from annual appropriations is assumed to keep pace with inflation. Under that baseline, discretionary spending would fall from 9.4 percent of gross domestic product (GDP) in 2010 to 6.7 percent of GDP in 2020, which is lower than the level seen in any year since 2001. In contrast, if appropriations were frozen at the 2010 level, total discretionary spending would fall to about 5 percent of GDP by 2020, the lowest share in more than 50 years. By comparison, in recent years discretionary spending has been rising significantly faster than inflation and somewhat faster (on average) than GDP: It grew at an average annual rate of 7.5 percent from 1999 through 2008 and by another 9 percent in 2009; it will grow by roughly 11 percent in 2010.

Mandatory spending has risen from 6 percent of GDP in 1970 to more than 10 percent in 2007; CBO projects that it will exceed 13 percent of GDP by 2020 if current laws remain in place. About 80 percent of the mandatory spending in 2020 will be for Social Security, Medicare, Medicaid, and health insurance subsidies provided under the new health care legislation. Another 8 percent will be for the governments retirement programs for civilian and military employees and for veterans benefits. Overall, the bulk of mandatory spending is for programs serving the older members of the population. The projected growth in mandatory spending over the next decade is, in roughly equal parts, attributable to (1) cost-of-living and other automatic adjustments to benefit payments, (2) changes in program participation, largely because of the aging of the baby-boom generation, and (3) other changes in benefits, particularly rising health care costs and increases in benefits that are linked by formula to wages.