How accurate are long-run budget projections?
Some elements of spending—health care costs and interest on the federal debt—are difficult to predict. But even in the best scenarios, the debt will remain a significant problem.
The Congressional Budget Office (CBO) has been making periodic long-run budget projections since the 1990s. Since then, policies have changed—as have economic and demographic assumptions underlying the analysis. But the lesson from these projections has remained the same: The United States is on an unsustainable fiscal path. That is to say, if policies are not reformed, the public debt will grow until no prudent investor will buy US Treasury securities.
The most important underlying cause of our public debt is population aging. The result is pressure on Social Security, the largest program in the budget, and on Medicare and Medicaid, the largest health insurance programs. Aging is easy to forecast because life expectancy has increased steadily and current age demographics are well known. More difficult to forecast are birth rates and growth of the taxpaying population, but birth rates have remained low for a long time with no surprises.
Per person health costs have risen faster than incomes, after adjusting for the population aging that has driven the projected rise in total spending. But this “excess cost growth” is difficult to forecast. After constituting most total health cost growth for decades, it slowed abruptly in the 2000s. And no one knows whether the slowdown will last or will be a one-time phenomenon.
Structural changes in the delivery of health care may hold down cost growth in the long run. On the other hand, excess cost growth might resume at historically familiar rates. In recent long-run projections, CBO has assumed that excess cost growth will indeed resume, but at a rate lower than the historical average.
Another uncertainty stems from the difficulty of forecasting the interest bill on the debt. Because of the Great Recession, the stimulus program, and relatively slow growth since, the debt-GDP ratio has risen from 35.2 percent in 2007 to 74.1 percent in 2014. That ratio is expected to decline slightly for a few years, but its magnitude makes long-run budget projections sensitive to assumptions about future interest rates. If deficits and the interest rate grow significantly in the long run, interest on the debt will spiral and become a major part of the debt/deficit problem.
Since the Great Recession, interest rates have remained extremely low relative to historical norms. CBO’s long-run projections assume an increase but not a return to historical averages. If interest rates do rise more than CBO assumes, the long-run budget outlook becomes more problematic.
On the other hand, if interest rates stay low and excess health costs grow less than CBO assumes, it is possible to construct plausible scenarios in which the debt-GDP ratio does not rise much. But an actual long-run decline in the ratio is highly unlikely because the aging population will drive growth of key spending programs. Many analysts argue that the ratio staying over 70 percent would be dangerous—it would reduce confidence in the government’s commitment to pay its debts, even as chronic deficits “crowded out” productivity-enhancing private investment. A recession accompanied by a stimulus program or a war could push the ratio above 100 percent in the blink of an eye.
The bottom line: health costs and the interest bill on the debt are more unpredictable than they seemed early in the 21st century. But the range of uncertainty is from a bad situation that may have stabilized to a bad situation that evolves into a nightmare. The uncertainty has not eliminated the need to improve an unsatisfactory long-run outlook.
Congressional Budget Office. 2015. The 2015 Long-Term Budget Outlook. Washington, DC: Congressional Budget Office, June.