I was very pleased to speak yesterday at the Stanford Institute for Economic Policy Research (see my slides below ). My remarks started with the observation that, under current law, the future of the federal budget will be strikingly different from its past in two key ways:
I presented CBO’s projections and showed that, by 2020 under current law, federal spending for Social Security and the major health care programs will be roughly 50 percent larger relative to GDP than it has been, on average, during the past 40 years—while federal spending for all other programs taken together will be a smaller percentage of GDP than it has been in at least 70 years. The decline in that latter category will occur under current law because of statutory caps that constrain total defense and total nondefense discretionary appropriations. However, the difficult decisions about how large the appropriations will be for specific programs will be made year-by-year in the future.
I explained that many observers worry that we have not explicitly decided as a society to shift spending between those types of activities. Rather, we seem to be drifting into that shift because spending for the largest benefit programs is determined by formulas for benefits per person that allow spending to grow without explicit action, whereas spending for many other federal activities is set through annual appropriations.
I concluded my remarks by saying: The largest federal programs are becoming much more expensive because of the retirement of the baby boomers and the rising costs of health care. As a result, even with federal spending for all programs other than Social Security and the major health care programs on track to reach its smallest share of GDP in at least 70 years, federal debt remains on an unsustainable path. Therefore, we will need to cut benefits from those large programs, raise tax revenue above its historical percentage of GDP to pay for the rising cost of those programs, or adopt a combination of those approaches.