Financial Security Politics

CBO’s Daunting Budget and Economic Outlook: 2016 to 2026

This month, the Congressional Budget Office (CBO) released their budget and economic projections for the next decade. After six years of budget deficit decline, the deficit will grow this year to $544 billion, an increase of $130 billion more than what CBO had projected in August, resulting in a $1.55 trillion higher deficit through 2025. The deficit will hit the trillion dollar mark in 2022. The national debt is projected to rise from $13.1 trillion (73.6 percent of GDP) to $23.8 trillion (86.1 percent of GDP), an increase of $10.7 trillion between 2015 and 2026.

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About half of the dismal fiscal outlook can be attributed to legislative changes, mostly December’s unpaid tax extenders and omnibus legislation. The outlook could worsen if lawmakers continue to pass legislation without serious consideration of funding, such as repealing sequester cuts without offsetting their costs, continuing temporary tax breaks, and repealing the Affordable Care Act taxes which were delayed last December. These actions would increase the debt from $23.8 trillion (86 percent of GDP) by 2026, to $25.5 trillion (92 percent of GDP) in that year.

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Outlays Overview

In 2016, spending will continue to outpace revenues. According to CBO’s projections, 83 percent of the $2.7 trillion rise in spending between 2015 and 2026 will be from Social Security, health care and interest on the debt.

Expenditures will rise by 6 percent or $3.9 trillion (21.2 percent of GDP), due to a 7 percent increase in mandatory spending (Social Security and healthcare), a 3 percent rise in discretionary spending (allocated through annual appropriations), and a 14 percent rise in net interest spending.

Mandatory spending is expected to rise by $168 billion with a 3 percent jump for Social Security and a whopping 60 percent jump for healthcare as a result of outlays for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, plus subsidies for health insurance purchased through exchanges and related spending. Combined, the expected costs are $104 billion, 11 percent higher this year than they were in 2015. 

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Discretionary and net interest spending will each increase by $32 billion. The rise in discretionary spending can be attributed to the Bipartisan Budget Act of 2015 (Public Law 114-74), which increased discretionary funding levels along with 2016 appropriations. Net interest spending will continue to rise as interest rates go up and the federal debt grows.

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Revenue Shifts

Although revenues are not keeping pace with spending, CBO still projects solid economic growth over the next few years. In 2016, revenues are expected to rise by 4 percent or $3.4 trillion (18.3 percent of GDP). Revenue growth will come from a 5 percent increase in individual income taxes (due to bracket creep) as nominal income continues to rise more than individual tax brackets, which usually happens when the economy expands. Other sources of revenue, an estimated 9 percent, will come mostly from recent legislation (the Fixing America’s Surface Transportation Act, also called the FAST Act, P.L. 114-94) that increases remittances to the Treasury from the Federal Reserve. Under the recent legislation, the Federal Reserve is required to pay most of its surplus account to the Treasury and to reduce dividends paid to large banks on their capital stock in the Federal Reserve. CBO has estimated that these remittances will increase by $16 billion in 2016, from 0.5 percent to 0.6 percent of GDP.

A source of declining revenue is corporate income taxes down 5 percent, cut due to recent legislation (the Consolidated Appropriations Act, 2016, P.L. 114-113) that extended various unpaid-for, expired tax provisions retroactively to the beginning of calendar year 2015.

Unsustainable Spending: Something’s Got to Give 

As spending continues to surpass revenues, our nation’s deficit grows, driving up our national debt. CBO’s projected deficits would drive debt held by the public to 86 percent of GDP by 2026. The deficit will grow slightly at around 2.9 percent of GDP through 2018, and then much faster to reach 4.9 percent of GDP by 2026, for a total deficit of $9.4 trillion between 2017 and 2026. In three decades, debt held by the public is projected to reach a historic peak of 155 percent of GDP. This overwhelming growth in our debt and deficit is unsustainable, not only does it increase the chances of another fiscal crisis, but it also limits our policy options if it were to happen again.

Sources:

Congressional Budget Office (CBO), The Budget and Economic Outlook: 2016 to 2026 (January 2016), available at https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51129-2016Outlook_OneCol-2.pdf
Image source: Washington Post 

Paula is a MPA student at American University, specializing in policy analysis. She is currently a fiscal policy intern. Paula serves as a Contributing Writer and Online Editor for the Public Purpose Journal. She was born and raised in New York, and has also lived in Montreal and Miami. Paula graduated from Florida Atlantic University with a degree in Business Administration. She began her MPA at Florida International University before transferring to American University in Fall 2015.

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