June 14, 2012
I was pleased to speak early yesterday with a group of reporters who gather regularly at the invitation of the Christian Science Monitor. (Audio of the event is below.)
At the beginning of the breakfast, I summarized two implications of CBO’s budget projections:
The first implication involves the choices facing the nation regarding the amount of taxes collected and the benefits provided by Social Security, Medicare, and Medicaid if we are going to put the federal budget on a path that is sustainable over the long term. Our projections show that it is possible to keep taxes at their historical average share of gross domestic product (GDP)—but only by making substantial cuts relative to current law in the large entitlement programs that benefit a broad group of Americans at some point in their lives. Alternatively, it is possible to keep the laws for the large entitlement programs unchanged—but only by raising taxes substantially on a broad group of Americans. Changes in other federal programs besides the large entitlements can affect the magnitude of the changes needed in taxes or the large entitlements, but they cannot eliminate the basic tradeoff.
The second implication involves the budgetary constraints that lawmakers face if they want to keep debt on the gradually declining trajectory relative to GDP that we project under current law. That path for federal debt might not be optimal, but it is one path that could be considered a plausible goal. To keep on that path, any actions that would significantly worsen the budget outlook relative to current law would need to be offset, or “paid for,” by other actions that would improve the outlook by comparable amounts. For example, removing the automatic spending reductions in the Budget Control Act would raise deficits by about a trillion dollars over the next decade, and extending all of the 2001 and 2003 tax cuts and indexing the AMT for inflation would raise deficits by about 4½ trillion dollars over the next decade (both figures exclude debt service costs). Making such changes to current law, while maintaining the same path of declining debt as under current law, would require other changes that would reduce deficits by roughly 1 trillion or 4½ trillion dollars, respectively.