Deficit Reduction and Choices for the Future

Posted by
Leigh Angres
March 9, 2017

While testifying at Congressional hearings last month about CBO’s outlook for the budget and economy, CBO’s Director was asked a number of questions about policies that could reduce budget deficits and ultimately lower the trajectory of federal debt. He mentioned that CBO had recently published a volume describing 115 such policies.

The policy options would reduce deficits either by decreasing federal spending or increasing federal revenues over the next decade. They are not recommendations by CBO and do not constitute an exhaustive list. The options come from a variety of sources, including legislative proposals, various Administrations’ budget proposals, Congressional staff, other government entities, and private groups. The volume is meant to help inform federal lawmakers about the implications of possible policy choices.

This blog post provides some related information about pressures on the budget and considerations involved in making choices for the future.

The Major Pressures on the Federal Budget

If current laws remained generally unchanged, budget deficits would eventually follow an upward trajectory—the result of strong growth in spending for retirement and health care programs targeted to older people and rising interest payments on the government’s debt, accompanied by only modest growth in revenue collections. Those accumulating deficits would drive up debt held by the public—from 77 percent of gross domestic product (GDP) at the end of 2017 to 89 percent of GDP by 2027 (or from $15 trillion to $25 trillion). At that level, debt held by the public would be the largest since 1947 and more than twice the average over the past five decades in relation to the size of the economy. Three decades from now, if current laws remained in place, debt would be nearly twice as high in relation to GDP as it is this year—and a higher percentage than any previously recorded.

Such projected deficits and debt reflect the weighty long-term budgetary challenges facing the nation. Because the population is aging and because health care costs per person are projected to grow faster than the economy, it is unlikely that the United States can sustain federal spending in its current form with the federal taxes as a share of GDP that the nation has been accustomed to paying. Even if productivity grew substantially more quickly than CBO expects—say, half a percentage point more quickly over the next decade—the projected budget deficit a decade from now would be only about one-fifth smaller than currently projected. That is, the deficit would still top $1 trillion. (To learn more about how changes in economic projections might affect budget projections, see Appendix B in CBO’s The Budget and Economic Outlook: 2017 to 2027.)

Choices for the Future

Making policy changes that are large enough to shrink debt as a percentage of GDP—or even to keep it from growing—would be a formidable task. Many of the policies described in the recent volume of budget options are scalable; for instance, tax rates could be raised by smaller or larger amounts, so the size of their effects could be changed. Nevertheless, over the next 10 years, as debt increases by $10 trillion, only 3 of the 115 options might save at least $1 trillion, CBO estimates.

To put the budget on a sustainable path for the long term, lawmakers would need to make significant policy changes—allowing revenues to rise more than they would under current law, reducing spending for large benefit programs to amounts below those currently projected, or adopting some combination of those approaches. Lawmakers and the public may weigh several factors in considering policies that would reduce budget deficits:

  • What is an acceptable amount of federal debt? How much deficit reduction is necessary? How rapidly should such reductions occur?
  • What is the proper size of the federal government, and what would be the best way to allocate federal resources?
  • What types of policy changes would most enhance prospects for near-term and long-term economic growth?
  • What would be the distributional implications of proposed changes? That is, who would bear the burden of particular cuts in spending or increases in taxes, and who would realize the long-term economic benefits?

Leigh Angres is CBO’s Associate Director for Legislative Affairs.