More Fun With the CBO’s Long-Term Budget Outlook April 12, 2017Posted by geoff in News.
[The TL:DR version of this post is: the 2016 budget projections were awful, and the 2017 projections are even worse. What will 2018 bring?]
In the last post we marveled at the huge debt projections provided by the CBO. In this post lets compare their 2016 projection to the 2017 projection (both graphics taken from their respective reports):
Lots of interesting things to see here. In these comparisons I’m going to ignore the one-year difference (from 2046 to 2047) in the 30-year projections.
- First, look at the average spending from 1966 – 2015 in the top chart. 20.2% of GDP, right? If you take the average from 1966 – 2008, i.e., before President Obama’s masterful captaining of the US economy, it was only 19.4%. In a mere 8 years he managed to pull the 50-year spending average up by almost a full percentage point.
- You can see that the 30-year spending projection has gone from 28.2% of GDP in the 2016 projection to 29.4%, while revenues rose from 19.4% to 19.6%. That means the deficit has increased from 8.8% to 9.6%. That little adjustment is worth $500 billion in 2047.
- Nice to see that “bent” healthcare curve continuing to bend upwards, with projected spending on Major Healthcare Programs increasing from 8.9% to 9.2%.
- The projection for net interest payments went up from 5.8% to 6.2%, which is more than twice the defense budget (they’re projecting ~2.7% of GDP for defense in 2047).
- Those interest payments are based on an assumption of low rates through 2047 (nominal interest rate on 10-year Treasuries was assumed to rise from 2.3% today to 4.7% in 2047) – lower interest rates than in the 2016 projection, BTW. Low interest rates are a relatively recent phenomena: prior to 2003 – you’d have to go back to 1967 to find a year with an interest rate below 5%. If you want a 2.3% interest rate, you’ve got to take the Wayback Machine to 1950.
So is the CBO’s assumption realistic? I don’t think so. Be prepared for major increases in future net interest projections.
The 2016 report was pretty bad, and the 2017 report is even worse, despite its optimistic assumptions regarding interest rates. Unless real GDP growth exceeds the CBO’s projected ~2% annual increase, I think the 30-year debt scenario is likely to be much worse than we saw in the previous post.