CBO predicts blizzard of debt
Mark Harkins | January 20, 2016
Saw a great tweet yesterday from Paul Singer (@singernews). In reply to Lisa Dejardins’ (@lisaDNews) tweet on the Congressional Budget Office’s (CBO) Budget and Economic Outlook: 2016 to 2026 (the Executive Summary was released Jan. 18) report predicting that the US will spend $6 trillion just on interest over the next 10 years Singer wrote “can’t they do a balance transfer to another credit card and get a better rate?”
If only. The CBO’s report is sobering on a number of levels. The main take away is the prediction of an annual deficit of $1.3 trillion in 2026. This is after a steady decline from the record $1.4 trillion in 2009 to a low of $439 billion in 2015.
There are three main drivers to this set back. The first is an increase in mandatory spending. CBO projects mandatory spending to grow from its current level of 13.1% of GDP to 15.0% of GDP by 2026. So even as the economy is projected to grow, payments for seniors, increases to veterans, as well as health care both Medicare and Obamacare will grow faster. But Social Security and Medicare are the main drivers accounting for nearly half the $2.5 Trillion increase that CBO is projecting over the next decade.
Discretionary spending continues to play a negligible role in deficit projections. CBO estimates that type of spending will fall from its current level of 6.5% of GDP to an historic low of 5.2% in 2026. While history only goes back to 1962, it is important to note as it shows that even with reductions discretionary government programs the budget goes further into imbalance.
The second major driver is a decrease in revenue. Congress passed a number of bills in December. According to the Joint Committee on Taxation, one effectively added more than $625 billion to the deficit through changes (extensions or making permanent) to 56 tax “extenders”. This will offset the expected increases in personal income tax receipts that will come as the economy continues to grow. While revenue will stay at approximately 18.0% of GDP, one would have expected a higher percentage as more people move into higher tax brackets. The passage of the extenders legislation effectively spent the increase in revenue even before it was realized.
And last, but not least, is the increase in debt payments. Our director, Ken Gold, has been arguing for years that this is the most insidious element in the growth of US debt. CBO’s report lays out in stark relief how right he is. Through a combination of increases to the debt because of each annual deficit and a projection that the Federal Reserves’ interest rates will increase from the current 0.5% to 3.5% by the end of 2019, annual debt payments are projected to increase from $223 billion in 2015 to $551 billion in 2021 to $830 billion in 2026. For perspective, $830 billion is only $150 billion below the entire discretionary budget for FY2013, defense and non-defense. And remember, for that $830 billion the US taxpayer gets nothing, nada, zilch; not one park, not one soldier, not one road or bridge.
I really do wish Capital One would give the government 1.5% back with the purchase of every aircraft carrier, but I don’t think Uncle Sam has a good enough credit rating to qualify.