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FREEDOM PARTNERS ANALYSIS OF CBO 2017 LONG-TERM BUDGET OUTLOOK Michael Decker, Senior Research Analyst M arch 30, the Congressional Budget Office (CBO) released its 2017 Long-Term Budget Outlook, which projects federal spending, tax collections, and various economic indicators from 2017 to 2047. This marks the first long-term report issued during the Trump administration and paints a troubling outlook for the country in the decades to come. According to the report, “If current laws generally remained unchanged, the Congressional Budget Office projects, growing budget deficits would boost that debt sharply over the next 30 years; it would reach 150 percent of GDP in 2047. The prospect of such large and growing debt poses substantial risks for the nation and presents policymakers with significant challenges…Such high and rising debt would have serious budgetary and economic consequences.”i With a new administration, Congress has the opportunity to adapt policies that curb government debt, spur economic growth, and reduce regulatory burdens for families and individuals. Some of these policies could include eliminating wasteful spending programs, repealing the Affordable Care Act, and continuing to roll back impeding regulations. ii,iii,iv Here are the facts from the report: INCREASED GOVERNMENT SPENDING According to the March 2017 long-term budget update, the CBO extended baseline predicts annual government spending will increase 56 percent over the next decade from roughly $4 trillion this year to $6.2 trillion by 2026.v Further, the CBO projects annual federal spending will increase to more than $18 trillion by 2047, representing nearly a third of the size of the 1 economy. According to the report, “By 2047, net interest costs would be 6.2 percent of GDP, raising total federal spending to more than 29 percent of GDP. Such spending constituted a larger share of the economy only for a single three-year period during World War II, when defense spending increased sharply. For those years, it exceeded 40 percent.” Government Spending On Net Interest And Entitlements Over Time Percentage of Total Federal Spending 80% 75% 70% 65% 60% 55% 2047 2046 2045 2044 2043 2042 2041 2040 2039 2038 2037 2036 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 Social Security Breaking down annual outlays, net spending on mandatory programs like Social Security and Medicare will increase from nearly $2 Mandatory Programs and Net Interest Payments trillion this year to roughly $3.4 trillion by 2026, or 12.6 percent of GDP. By 2047, spending on mandatory programs is projected to represent more than one-out-of-every-two dollars the government spends. When incorporating interest payments to service the national debt, this grows to nearly three-out-of-every-four total federal dollars spent in 2047. CBO reports, “On average, federal outlays for Social Security and Medicare made up almost 40 percent of total noninterest spending during the past 10 years, compared with 16 percent 50 years ago.”vi Source: Freedom Partners Analysis, Congressional Budget Office March 2017 2047 2046 2045 2044 2043 2042 2041 2040 2039 2038 2037 2036 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 Trillions of Dollars TRILLION DOLLAR DEFICITS Although deficits decrease in the short-term, Annual Budget Shortfalls Surpass $6 Trillion By 2047 the CBO estimates the government will run a $6 cumulative budget shortfall of nearly $9 trillion over the next decade. By 2023, annual $5 government deficits are projected to reach $4 $1 trillion and continue to rise through 2026 $3 when the government is projected to end the year roughly $1.3 trillion over budget. $2 Looking further, deficits continue to rise at $1 a more than 7 percent average annual rate 0 between 2027 and 2047, leading to a government shortfall nearly one-tenth of the size of Annual Budget Deficits the economy. The CBO notes the continued growth in spending – specifically for Social Security, Medicare, and net interest on the national debt – eventually outpaces tax collections and leads to larger deficits and higher debt.vii Source: Freedom Partners Analysis, Congressional Budget Office March 2017 SLOW ECONOMIC GROWTH The economy is projected to grow by 2.3 percent this year, up from the 1.6 percent real GDP growth observed during 2016. viii Despite this increase, the CBO projects annual real GDP growth will decrease to 2 percent during 2018 and further drop to an annual average of 1.6 percent between 2019-2020. Overall, real annual GDP growth is expected to average only 1.9 percent over the next decade. Looking further, real annual GDP growth averages a meager 2 percent from 2027-2047.ix The CBO notes, “...potential (maximum sustainable) growth in GDP in the future will be slower than it has been over the past 50 years. Under its extended baseline, CBO projects an increase in real (inflation-adjusted) potential GDP of 1.9 percent per year, on average, over the next 30 years, compared with 2.9 percent over the past 50 years.” This slow annual growth projection offers little hope for an economy that is still struggling through the weakest expansion since 1949.x 2 UNSUSTAINABLE FEDERAL DEBT According to CBO’s March estimate, debt held by the public will increase from more than three-fourths the size of the size of the economy this year, to 87 percent of GDP by 2026. Over this period total debt held by the public will increase more than $8 trillion, or 58 percent. Per Person Share Of National Debt Grows To Over $235K By 2047 $240,000 $220,000 Debt Per Person $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 Further, CBO notes the extended projections show “a substantial imbalance in the federal budget over the next three decades…” By Debt Held by the Public 2033, debt held by the public grows larger than the size of the entire economy and continues to increase through 2047. This represents the highest levels of debt seen since World War II, where debt held by the public reached 106 percent of GDP. xi 2045 2046 2047 2044 2043 2042 2040 2041 2039 2037 2038 2036 2034 2033 2035 2031 2032 2029 2030 2027 2028 2026 2024 2025 2022 2023 2021 2019 2017 2018 $40,000 2020 $60,000 Source: Freedom Partners Analysis, Congressional Budget Office March 2017 For years the CBO has analyzed the potential consequences of leaving federal debt unchecked. xii Last summer, the CBO warned that large and growing debt could hurt the economy and constrain future budget policy. This in turn would “limit lawmakers’ ability to respond to unforeseen events; and increase the likelihood of a fiscal crisis…” xiii In 2014, CBO analysts explained how large amounts of government debt could reduce national savings and income, as well as draw money away from private investment.xiv The effects of these poor spending policies, which lead to high amounts of public debt, can negatively impact individuals and families. Argentina and Greece serve as important reminders of what large amounts of government debt can do to the economy. CONSEQUENCES OF HIGHER DEBT SEEN THROUGH GREECE AND ARGENTINA As we saw in Argentina and Greece, a large amount of government debt has several negative impacts that effect the entire population. Argentina During the Argentina debt crisis in the early 2000s, in which the government’s debt-to-GDP ratio reached 152 percent, currency devaluation led the country’s 1:1 exchange with the U.S. dollar to drop to 4:1. Simultaneously, inflation reached 41 percent by 2002—a stark contrast from the low or negative inflation rates seen during the early 1990s.xv, xvi As the Argentinian economy began to collapse, unemployment increased to more than 22 percent by 2002, while more than 57 percent of the population slipped below the poverty line. A decade later, Greece experienced similar negative effects when its debt-to-GDP ratio soared to 180 percent. During the crisis, the country’s unemployment rate skyrocketed from nearly 13 percent in 2010 to over 27 percent by 2013.xix, xx Debt: 152 Percent of GDP by 2002 Unemployment: 22.5 Percent by 2002 Greece: Debt: 180 Percent of GDP by 2014 Unemployment: 26.5 Percent by 2014 United States: Debt: 150 Percent of GDP by 2047 Unemployment: ????? Source: International Monetary Fund 3 In order to combat the devastating effects of an increasing national debt, cuts to mandatory spending programs as well as sales tax increases were instituted in these two countries. Greece enacted a series of “austerity cuts,” cutting pension payments of 2,000 euros per month by 40 percent, and payments of 1,000 euros per month by 14 percent. Further, Greece increased its sales tax rate from 13 to 23 percent in 2015, costing Greeks an additional $1,635 per person annually. This sharp rise in taxes caused prices for commodities such as meat, sugar, and bread to increase 9 percent.xxii Argentina similarly cut pension payments and by the peak of the crisis taxed Social Security and medical care by nearly 32 percent.xxiii, xxiv WITHOUT PASSING MEANINGFUL REFORMS WE ARE HEADING TOWARDS BANKRUPTCY Today’s CBO report confirms the U.S. is on an unsustainable path that will soon crush our economy and will hurt millions of hardworking Americans. During the Obama years, overall government spending exploded, leading to annual deficits in the trillions of dollars and to the national debt doubling. Year after year, President Obama kept asking for more spending – and more taxing. Under a new administration, Congress has the opportunity to pass a sensible budget that enacts meaningful spending reforms and sets forth a plan to address long-term debt and the looming entitlement crisis. Ultimately, that will be the only way to truly relieve the burden of trillion dollar deficits looming over taxpayers and weighing on the economy. This is an opportunity for Congress and President Trump to come together and truly secure America’s fiscal future. Without making significant and meaningful reforms, the national debt will continue to skyrocket, unemployment and poverty will rise, and America won’t be great – it will be bankrupt. i. Report, “The 2017 Long-Term Budget Outlook,” The Congressional Budget Office, 3/30/17. ii. Fact Sheet, “Tax Reform Can Happen Without Border Adjustment,” Americans For Prosperity, 2017. iii. Report, “Health Care: A Targeted Approach,” Freedom Partners, 1/30/17. iv. Report, “A Roadmap To Repeal: Removing Barriers To Opportunity,” Freedom Partners, 1/6/17. v. CBO, 2017 Long-Term Budget Outlook. Unless otherwise noted, all dollar figures listed in this report are derived by converting CBO’s estimates of “percentages of GDP” to dollars using Nominal GDP projections. vi. CBO, 2017 Long-Term Budget Outlook. vii. Ibid. viii. 2016 Annual Real GDP, “Percent Change From Previous Period,” Bureau Of Economic Analysis, Accessed 3/30/17. ix. CBO, 2017 Long-Term Budget Outlook. x. Jeffrey Sparshott, “U.S. GDP Advanced 1.9% In Final Quarter Of 2016,” Morningstar, 2/28/17. xi. CBO, 2017 Long-Term Outlook. xii. Report, “The 2015 Long-Term Budget Outlook,” The Congressional Budget Office, 6/16/15. xiii. Report, “The 2016 Long-Term Budget Outlook,” The Congressional Budget Office, 7/8/16. xiv. Report, “The 2014 Long-Term Budget Outlook,” The Congressional Budget Office, 7/15/14. xv. Historical Public Debt Database (HPDD), “Argentina Debt To GDP Ratio,” International Monetary Fund, Accessed 3/29/17. xvi. Jim Saxton, “Argentina’s Economic Crisis: Causes And Cures,” Joint Economic Committee, June 2003 xvii. Argentina Unemployment Rate: Percent Of Total Labor Force: 1990-2014, International Monetary Fund, Accessed 3/29/17. xviii. Saxton, JEC. xix. Historical Public Debt Database (HPDD), “Greece Debt To GDP Ratio,” International Monetary Fund, Accessed 3/29/17. xx. Greece Unemployment Rate: Percent Of Total Labor Force: 2008-2015, International Monetary Fund, Accessed 3/29/17. xxi. Alanna Petroff, “How To Fix Greece’s Big Pension Problem,” CNN Money, 7/15/15. xxii. Holly Ellyatt, “How Greek Firms Are Coping With Massive Tax Hikes,” CNBC, 7/20/15. xxiii. Boris Korby & Katia Porzecanksi, “Argentina Bust Lures Investors After 200 Years Of Defaults,” Bloomberg, 2/3/14. xxiv. Steve Hanke, “Argentina’s Current Political-Economic Crisis,” Cato Institute, 3/5/2002. 4