Some Context for Thinking About Deficit Reduction: Implications for Future Budget Policy

September 30, 2011

In blog postings this week, I’ve reviewed the historical experience and CBO’s projections for three broad components of the federal budget: revenues; Social Security and the major health care programs; and all other spending excluding interest payments. Today I’ll discuss some of the implications of that experience and those projections for future budget policy.

Combining the various components of spending, total federal spending excluding net interest will represent 19.9 percent of GDP in 2021, according to CBO’s projections under current law, a bit above the 40-year average of 18.6 percent. And the composition of that spending will be noticeably different from what the nation has experienced in recent decades: Spending for Social Security and the major health care programs will be much higher, and spending for all other federal programs and activities, except for net interest payments, will be much lower (see the figure below). Alternatively, if the laws governing Social Security and the major health care programs were unchanged, and all other programs were operated in line with their average relationship to the size of the economy during the past 40 years, total federal spending would be projected to be much higher in 2021—nearly 24 percent of GDP. That amount exceeds the 40-year average for revenues as a share of GDP by nearly 6 percentage points—even before interest payments on the debt have been included.

Federal Revenues and Spending Historically and in 2021 Under CBO's Baseline
Federal Revenues and Spending Historically and in 2021 Under CBO's Baseline

At the same time, the sharp increase in federal debt and a return to more-normal interest rates will boost the government’s net interest costs. They are projected to reach 2.8 percent of GDP in 2021, compared with only 1.5 percent of GDP in 2011 and an average of 2.2 percent of GDP during the past 40 years.

What do those numbers imply about the choices that policymakers—and citizens—confront about future policies? Given the aging of the population and the rising costs for health care, attaining a sustainable budget for the federal government will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:

  • Raise federal revenues significantly above their average share of GDP;
  • Make major changes to the sorts of benefits provided for Americans when they become older; or
  • Substantially reduce the role of the rest of the federal government—that is, defense, the Supplemental Nutrition Assistance Program, unemployment compensation, support for blind and disabled people, other income-security programs, health care programs for people under age 65, veterans’ benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and other programs—relative to the size of the economy.

In sum, the nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both.