Yesterday, the CBO put out a new budget projection (pdf). Lori Montgomery summarizes:
For the 10-year period beginning in 2010, the estimated cost of Medicare and Medicaid — the government health programs for the elderly and the poor — has dropped by $1.23 trillion, according to revised CBO projections. In its latest look at the nation’s long-term finances, released Tuesday, CBO predicts that the savings will grow by 2039 to 1.5 percent of the economy — or, in today’s dollars, roughly $250 billion a year. That’s real money by any measure. But it’s not enough to brighten the CBO’s otherwise gloomy forecast for the next 25 years.
Besides the improved Medicare and Medicaid numbers, Andrew Smith finds “not much good news here”:
Under current law according to the CBO, debt will rise from 74 percent of GDP in 2014 to 80 percent of GDP by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. These almost apocalyptic projections don’t even fully account for the scale of our predicament, as current law is held down by budgeting distortions, some benign and some gimmicky, like tax breaks that are projected to expire even though they’ll more than likely be extended and unrealistic cuts in Medicare reimbursement rates. As soon as 2039, the CBO anticipates a deficit of 6.4 percent of GDP.
Among William G. Gale’s take-aways:
The magnitude of the changes in policy needed to ensure that the debt-GDP ratio in 2039 returns to its historical average over the last 40 years – around 39 percent – depends on when corrective policies are initiated.
If policies were initiated next year, then it would take a cut in non-interest spending or an increase in taxes or a combination equal to 2.6 percent of GDP on an annual basis – about $465 billion in today’s economy. If we wait until 2020, it would require annual cuts of 3.5 percent of GDP. Twenty-five years may seem like a long time from now, but the longer we wait, the larger the changes will need to be.
Vinik sees the report as confirmation that taxes must go up:
We could make severe cuts to Medicare and Social Security. But that would undo decades of success in reducing the poverty rates for seniors. We could make severe cuts elsewhere. But all other federal spending outside of interest payments—from the military to food stamps to agricultural subsidies—is projected to decline to a smaller share of GDP than at any point since the late 1930s. There is little room to cut there without causing serious damage.
That leaves one other option: higher revenues. Not just slightly higher revenues, but a lot higher.
But Pethokoukis argues the “the CBO report clearly states we cannot just tax our way out of this problem.”
[E]ven though revenue will rise 6 percentage points over historical levels, spending will rise by 16 points over historical levels. Record tax revenue, but also record spending. As I said, there’s your trouble.
Margot Sanger-Katz emphasizes the uncertainty of future Medicare costs:
C.B.O. points out that it can’t pinpoint the cause of the recent slowdown or its durability, which is why it’s not changing its fundamental view of where Medicare spending is heading over the very long term. “How long the slowdown might persist is highly uncertain,” the report says.
That’s probably smart. Even economists who are most enthusiastic about the recent numbers still aren’t sure whether the trend is here to stay.
also address the inherent uncertainty of these calculations:
A key question for economists and policymakers is how to think about this uncertainty: how should recognizing how little we know about the future affect our policy choices today? Some analysts believe that we should take action now to insulate us against the risk of larger-than-expected budget imbalances in the future. Others—particularly those who are very hopeful about future health cost growth—prefer “watchful waiting.”
The Dish 