Choices for Federal Spending and Taxes

March 26, 2012

I was pleased to have an opportunity to speak this morning to the National Association for Business Economics about the choices our country faces about federal spending and taxes. My slides can be viewed below. The essence of my comments was the following:

Under CBO’s alternative fiscal scenario, which illustrates the budgetary consequences of maintaining what many people would think of as current policies, all federal spending apart from Social Security, the major federal health care programs, and interest is on track to be smaller relative to GDP by 2022 than at any point in the past 40 years—and only about two-thirds of its average share of GDP during that period. If that outcome is achieved, putting federal debt on a sustainable path still requires changes in Social Security, the major federal health care programs, and taxes that amount to about $750 billion in 2022.

To meet that target for 2022, one can think of two broad choices:

  • If lawmakers extend the expiring tax provisions (other than the payroll tax reduction) and index the alternative minimum tax for inflation, as described in the alternative fiscal scenario, they would need to cut spending on Social Security and the major federal health care programs by about one-fourth. Because most of such spending goes to people over age 65, a cut of that magnitude would represent a major change to the sorts of benefits provided for Americans when they become older.
  • Alternatively, if lawmakers do not change spending on Social Security and the major federal health care programs, they would need to raise tax revenue by about one-sixth. Such an increase would raise federal revenues significantly above their average share of GDP in the past several decades.

Of course, lawmakers could also adopt some combination of those choices, cutting spending on those programs by somewhat less than one-fourth and raising tax revenue by somewhat less than one-sixth.

My presentation included a number of specific options for reducing spending on Social Security and the major health care programs and for increasing taxes (see slides 12 through 18). I emphasized that these were not recommendations, which CBO never makes. Instead, our role is to examine policy ideas, estimate their likely effects on the budget, and discuss their broader implications to the extent we can. We publish many reports with that sort of information, and I picked out a few examples to offer a sense of the magnitude of the changes that will be needed.