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KNUDSEN: The Obamacare hit on the nation’s fiscal health

‘Liberating’ workers from their jobs will weaken economic growth

- - Wednesday, February 12, 2014

Almost lost in the polemics over Obamacare's depressing impact on employment was the troubling overall outlook presented recently by the Congressional Budget Office (CBO).

Prospects for both the budget and the economy in general are declining, in the CBO's view, with potential consequences severe enough that they demand further attention.

Start with budget deficits. During the next 10 years, the government's pool of red ink will rise by fully $1 trillion compared with what the CBO projected as recently as last May — an increase of nearly 16 percent (from $6.3 trillion to $7.3 trillion).

The $514 billion deficit for 2014 looks like progress only when compared to the trillion-dollar-plus totals of recent years, notes the Heritage Foundation's Romina Boccia. In one of the few thorough accounts of the CBO's analysis, Ms. Boccia writes: "[T]his year's improvement is a misleading short-term phenomenon."

It is not, though, for a lack of taxes. In the CBO's estimates, federal tax revenues will rise by a healthy 9 percent this year — $255 billion — reaching an unprecedented $3 trillion.

That total represents roughly 17.5 percent of the nation's economic output as measured by gross domestic product (GDP), a level the CBO describes as slightly greater than the average of the past 40 years.

Revenue will rise another 9 percent in 2015, and then continue growing in subsequent years, reaching 18.4 percent by 2024, the CBO says. In other words, federal taxes will claim an ever-greater share of the economy.

The problem is, "higher revenues will continue to chase higher spending," notes Ms. Boccia. Even with the alleged austerity of the Budget Control Act, government outlays will surge from 20.4 percent of GDP this year to 22.4 percent in 2024.

These are near-record levels for peacetime spending, and they will continue in future decades, heaping on more debt even as tax revenues continue growing.

"[T]he aging of the population and rising costs for health care would almost certainly push federal spending up significantly relative to GDP after 2024 if current laws remained in effect," says the CBO. "Federal revenues also would continue to increase relative to GDP under current law, reaching significantly higher percentages of GDP than at any time in the nation's history — but they would not keep pace with outlays. As a result, public debt would reach roughly 110 percent of GDP by 2038, CBO estimates, about equal to the percentage just after World War II."

As usual, the higher spending will be driven mainly by the government's major entitlements, Medicare, Medicaid and Social Security. These three programs will surge to 52 percent of total federal spending in the next 10 years, including the Medicaid expansions under President Obama's health care law.

Add to that Obamacare's additional $1.2 trillion in gross outlays, and the conclusion is clear: Current spending practices are worsening an already unsustainable fiscal trend.

Meanwhile, the CBO's economic projections have fallen as well. The agency's estimates of real GDP growth are now lower each year for the next decade compared with the outlook last February, with GDP growth averaging just 2.6 percent for 2014 through 2023.

In some years, the growth projections have shrunk by a full percentage point, or close to it (Table 1). The CBO also has reduced its projections of monthly job gains through the next decade (Table 2). This is where Obamacare's employment effects play into the overall picture.

Because labor is a key component of GDP, one reason for the slower projected growth is the continued decline in labor-force participation, which already has reached its lowest levels in 3 decades. Participation will sink further, partly as a result of the long-anticipated baby-boomer retirements.

Adding to that trend, Obamacare will encourage some workers to work less, or not at all, so they can retain their government health subsidies. This will reduce the number of hours worked by the equivalent of about 2 million workers in 2017, rising to 2.5 million in 2024.

Defenders of the health care law gamely tried to contend this is a good thing. It demonstrates, they argue, how the health care law frees workers from the "job lock" that tied them to work they didn't like just so they could keep their employment-based health insurance.

That, however, is not what the CBO said. The agency's report explained that Obamacare's phaseout of subsidies with rising income creates "an implicit tax on additional earnings," thereby discouraging workers from earning more.

That's why these workers will choose to work less, or not at all — to avoid the effective tax penalty. Thus, the health care subsidies themselves shackle recipients to lower incomes.

Still, if the Obamacare advocates want to cling to their freedom-from-job-lock claim, they should be pleased to note another of the CBO's findings: A net average of 6 million to 7 million more workers will likewise be liberated from their job-related health insurance each year, as employers drop their group coverage owing to Obamacare.

The CBO's account is even more devastating in light of the agency's generally agnostic view of how best to shrink deficits and debt — whether through lower spending or higher taxes or both.

Whatever its official stance, the CBO's latest budget and economic report confirms, once again, that the unrestrained pace of government spending threatens to drive the U.S. economy toward a crisis that may soon become unavoidable.

Patrick Louis Knudsen is a Washington-based writer who served for 20 years on the staff of the House Budget Committee.