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Choosing the Nation's Fiscal FutureHearing before the Senate Budget Committee U.S. CongressAbstractToday's federal budget policies are unsustainable. Three programs — Social Security, Medicare, and Medicaid — constitute more than 40 percent of spending other than interest in a normal year and all are growing faster than the economy and tax revenues. At the same time, Congress has kept the overall tax burden remarkably constant as a share of gross domestic product for most of the past 50 years. The combination of these factors leads to a growing deficit. This testimony, by a former Congressional Budget Office director, discusses four policy packages that would return the United States to a sustainable budget. The text below is an excerpt from the complete document. Read the full written testimony with references in PDF format. TestimonyMr. Chairman, Senator Gregg and other members of the Committee, I would like to thank you for this opportunity to testify on Choosing the Nation’s Fiscal Future, the report of a committee organized by the National Research Council and the National Academy of Public Administration and funded by the John D. and Catherine T. MacArthur Foundation. I cochaired the committee along with John Palmer of Syracuse University. Like other reports, this one describes the unsustainability of today’s budget policies. The arithmetic of the budget problem is simple. Three programs—Social Security, Medicare, and Medicaid—constitute more than 40 percent of spending other than interest in a normal year, and all are growing faster than the economy and tax revenues. At the same time, Congress has kept the overall tax burden remarkably constant between 18 and 19 percent of the gross domestic product (GDP) for most of the past 50 years. The combination of three large, rapidly growing programs and a constant tax burden inevitably implies a growing deficit if spending for other government spending programs is held to a constant share of GDP. As the deficit increases, the national debt grows faster and faster, and interest on the debt becomes a budget problem in itself. In the baseline projection used for our study, the debt passes 100 percent of GDP in the late 2020s and 200 percent shortly after 2040 under the very conservative assumption that interest rates and the rate of economic growth remain constant in the face of rapidly growing deficits. It is, however, highly unlikely that world capital markets will tolerate this sort of fiscal profligacy for a long period of time. The market for our debt would collapse long before 2040. There are many indications of these long-run problems in the 2011 budget the administration just issued. Spending for Social Security, Medicare, Medicaid, and interest already equal almost 70 percent of revenues in 2011. Although the absolute level of the deficit declines from 2010 to 2014, it rises thereafter and begins to grow as a share of GDP after 2018. The debt in the hands of the public rises from 53.0 to 77.2 percent of GDP between 2009 and 2020. The interest bill more than quadruples over the same period. Our committee believes that Congress should set a target for the debt-to-GDP ratio and not exceed it. Given an explicit target, the American people could judge how well the Congress and administration are doing in their pursuit of fiscal responsibility. We believe further that a prudent target would hold the debt to 60 percent of GDP. That ratio should be achieved by 2022, and we should begin implementing the necessary policies by 2012. If the nation experiences good fortune while holding the debt to this level, it would be wise to lower the target further. (End of excerpt. The full testimony is available in PDF format.) |
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