Presentation on The Federal Budget Outlook and Aid to States

March 21, 2012

Yesterday morning, CBO's Associate Director for Economic Analysis, Jeffrey Kling, spoke to the National Lieutenant Governors Association. His presentation—which can be viewed below—focused on the federal budget outlook (which you can read more about in my post on CBO's updated budget projections from last week) and federal programs that provide aid to states and localities. The following is some of the information he presented about the outlook for such programs.

Medicaid and the Children's Health Insurance Program

Federal spending for Medicaid and for the Children's Health Insurance Program—which are jointly financed by the federal government and the states, and which together account for the largest share of federal grants to states—is projected to increase from 1.7 percent of the nation's output (gross domestic product, or GDP) in 2012 to 2.5 percent of GDP by 2022. Enrollment is expected to rise rapidly over the coming decade as more people become eligible for Medicaid under provisions of the Affordable Care Act (the 2010 health care legislation) and as the number of elderly people rises. By 2022, about 94 million people—more than a quarter of the U.S. population—will be enrolled in Medicaid at some point in the year, CBO estimates. For many of those new enrollees, the federal share of their costs will be significantly larger than the share for individuals enrolled in Medicaid today.

Income Security Programs

CBO projects that federal spending on child nutrition programs will grow nearly as much as economic output over the next ten years. In contrast, spending in nominal terms for Temporary Aid for Needy Families (TANF) will be essentially unchanged—so as prices rise and the economy grows, spending on TANF will become a smaller share of output. For the five types of income security programs providing the largest amounts of federal aid to states and localities (child nutrition programs, Temporary Assistance to Needy Families, administrative funds for the Supplemental Nutrition Assistance Program, foster care and permanency, and child support enforcement), spending as a share of output will decrease by 35 percent—from 0.8 percent of GDP in 2012 to 0.5 percent in 2022—under current law.

Discretionary Programs

About one-third of all nondefense discretionary spending is for programs providing aid to states and localities, for purposes such as transportation, education, and housing. Such programs will probably experience budgetary pressure under current law, but exactly how they will be affected is uncertain.

The Congress has not yet made decisions about how much funding to provide for specific programs in 2013 so as to stay within the limits set by the Budget Control Act—last year's legislation that established caps on certain types of discretionary funding, called for a process to achieve additional deficit reduction, and set up automatic spending-reduction procedures to take effect if that process did not succeed. CBO projects that, under the procedures established by that act, the total amount of nondefense discretionary spending will fall by 35 percent as a share of output—from 4.1 percent in 2012 to 2.6 percent in 2022.