The nonpartisan Congressional Budget Office on Tuesday released its annual Long-Term Budget Outlook, giving taxpayers a look into the future of the federal government's fiscal fate. The diagnosis: not good.
Compared to last year, the CBO projects slower economic growth, less payroll tax revenue and lower interest rates over the coming decades. Combined, this will initially mean a higher budget deficit, but projections eventually lead to a slightly lower one.
Even though the long-term projections have changed only slightly in the past year, Congress still has a lot of work to do.
Here are four charts that show just how bad the federal budget situation has gotten:
Deficits are rising.
Ideally, the federal government would spend as much as it receives in the tax revenue. The last time that happened was in fiscal year 2001. The next time it's going to happen again? Possibly never. After peaking during the recession at almost one-tenth of the economy, the federal budget deficit is projected to bottom out at 2.4 percent of GDP in 2017. After that, it will begin a long, gradual rise back toward becoming almost one-tenth of the economy.
Debt is rising even faster.
As deficits rise, debt will rise even faster. In less than 25 years, the size of the federal debt will equal the size of the entire economy, something not seen since World War II. Keep in mind that these projections assume the country does not enter a new world war. These levels of debt are unprecedented in peacetime. By the 2070s, federal debt held by the public will be double the level seen today.
People are getting older.
What is it about the current state of affairs that makes the situation so dire? Our aging population.
Today, Social Security and Medicare take up 41 cents of every federal dollar spent, besides interest. Fifty years from now that will rise to 58 cents.
Those programs primarily give taxpayer money to people aged 65 and older. In theory, the United States population is supposed to grow fast enough so that younger generations can pay for older generations. But the population isn't procreating fast enough to fund the programs. Either benefits have to be cut to bring program costs down, or the U.S. will have to allow more immigration for there to be enough younger taxpayers to fund Social Security and Medicare.
It could get much better ... or not.
We are not resigned to live with the consequences of bad fiscal policy: slower economic growth, a lower standard of living and a federal budget increasingly burdened by interest payments from past borrowing.
The important thing to remember about projections is that Congress and the president have the power to improve — or worsen — them. If spending is brought under control, entitlement programs are reformed and the economy achieves better than expected growth, the fiscal situation would dramatically improve. If the deficit is cut by $2 trillion, the government could begin paying off the federal debt. If it were cut by $4 trillion, the federal debt would be cut by more than half by 2040, with the government well on its way toward historical norms.
Then again, it is possible for Congress to make the situation even worse. Increasing the deficit by $2 trillion with more spending would double the federal debt in less than half the time.