At a time when there seems to be little agreement in Washington about any major national policy issue, the emerging consensus among experts across the political spectrum on the bleak long-run budget outlook is striking.
That consensus rests on two fundamental conclusions: (1) Without changes in policies, the growing mismatch between revenue and spending in coming decades risks seriously damaging the economy; and (2) The essential goal must be to make changes in policies sufficient to ensure that the national debt ultimately grows no faster than the economy.
In the past eight months, major long-term budget analyses have come from the Center on Budget and Policy Priorities, the Congressional Budget Office, economists Alan Auerbach of the University of California at Berkeley and William Gale of the Brookings Institution, the Government Accountability Office, the Peterson-Pew Commission on Budget Reform and a committee established under the auspices of the National Academy of Sciences and the National Academy of Public Administration (NAS-NAPA).
They all agree on the following:
First, annual deficits and total national debt will skyrocket in coming decades under current policies, ultimately threatening not only the federal budget but also the economy and Americans’ standard of living.
Second, the problem isn’t today’s large deficits, which primarily reflect the recession and temporary measures taken in response to it — and are necessary given the current weak economy — but the huge and continued increase in deficits projected for future decades, well after the economy recovers.
Third, the single biggest cause of rising long-term deficits is the rapid growth of per-person health care costs across the U.S. health care system.
Fourth, it’s absolutely essential to prevent the debt from perpetually rising as a share of the economy, or the gross domestic product (GDP). That is, in the years after the economy recovers, we must stabilize the debt-to-GDP ratio so the debt isn’t increasing faster than our ability to pay the related interest costs.
If we don’t act, the debt is on course to eventually blow past the existing record of 110 percent of GDP, reached at the end of World War II, and keep rising, to about 300 percent of GDP in 2050.
At that point, annual interest costs will reach a staggering 15 percent of GDP — more than the combined cost that year of Social Security and Medicare, both of which will be considerably costlier than they are today. A large chunk of the federal budget will be walled off to pay interest costs and thus won’t be available for priorities such as education, national defense or medical research.
Admittedly, stabilizing the debt-to-GDP ratio is a more abstract goal than other measures of fiscal responsibility that some have suggested in the past, such as balancing the budget. But experts agree that it — not balancing the budget — is the absolutely essential goal.
What would it take to get there? As a rule of thumb, the United States could stabilize its debt-to-GDP ratio if it reduced deficits to about 3 percent of GDP and kept them there. We could reach that target after the economy recovers if we cut spending and increase tax revenue by an average of $370 billion a year each year from 2013 through 2019. (Implementing large-scale deficit-reduction before 2013, the year CBO says the economy will have recovered from the downturn, would risk pushing us back into recession.)
This would mean cutting the deficit projected for 2019 by more than half, even as baby-boomer retirements and rising health costs push up the cost of Social Security, Medicare and Medicaid. It would stabilize the debt at modestly over 70 percent of GDP.
This would be an ambitious undertaking, to say the least — considerably larger than any deficit-reduction effort Congress has ever made.
Some other recent proposals would demand even sharper cuts in deficits. The Peterson-Pew Commission and the NAS-NAPA Committee recommend stabilizing the debt-to-GDP ratio at 60 percent of GDP.
That target is both unnecessary and unrealistic. There’s nothing magic about the 60-percent-of-GDP level — no evidence that the economy couldn’t handle a debt-to-GDP ratio modestly above it. And meeting that target by 2018, as the Peterson-Pew Commission recommends, would require Congress to cut spending and/or increase taxes by an average of $700 billion per year from 2013 through 2019. That’s simply not going to happen.
History suggests that setting the bar this high could actually backfire, making the problem seem so insoluble — and the actions needed to hit the target so politically excruciating — that policymakers wait even longer before facing up to it. In the 1980s, for example, the overly ambitious deficit targets under the Gramm-Rudman-Hollings law led both parties to focus more on concocting rosy economic assumptions and budget gimmicks than on making real progress against the deficit.
The specific differences among the recent proposals shouldn’t obscure their larger agreement on the need for sustained, aggressive action to stabilize the debt as a share of the economy. Obviously, the hardest part of restoring fiscal responsibility will be making the spending cuts and tax increases needed to get the debt under control. Agreement on those tough choices is probably a long way off. But understanding the challenge we face and the goal we need to attain is a first step.
• Robert Greenstein is executive director of the Center on Budget and Policy Priorities.