CBO Releases the 2012 Long-Term Budget Outlook

June 5, 2012

This morning CBO released the latest in its series of reports on the long-term budget outlook. CBO also published an infographic that highlights the key points of the report. Tomorrow, I will testify on the key findings of the report before the House Budget Committee.

By the end of this year, CBO projects, federal debt will reach roughly 70 percent of gross domestic product (GDP), the highest percentage since shortly after World War II. Whether that debt will continue to grow in coming decades will be affected not only by long-term demographic trends—particularly the aging of the population—and economic developments but also by policymakers’ decisions about taxes and spending. The aging of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security and Medicare, as well as long-term care services financed by Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many years (although the magnitude of that gap is uncertain).

CBO examined the pressures on the federal budget under two scenarios—the extended baseline scenario and the extended alternative fiscal scenario—that embody different assumptions about future policies governing federal revenues and spending. As shown in the figure below, those two scenarios present very different pictures:

  • Under the extended baseline scenario, which generally adheres closely to current law, federal debt would gradually decline over the next 25 years—to 53 percent of GDP in 2037—because revenues would reach levels that are high by historical standards, and spending for programs other than the major health care programs and Social Security would reach the lowest level relative to GDP since before World War II.
  • The budget outlook is much bleaker under the alternative fiscal scenario: Even without accounting for the negative effects that additional federal debt would have on the economy, that debt would reach nearly 200 percent of GDP in 2037 because revenues would remain at levels similar to those experienced historically, while spending would grow because of aging and rising health care costs.

The explosive path of federal debt under the alternative fiscal scenario—which maintains what might be deemed current policies—underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course.

Federal Debt Held by the Public, 1912 to 2037