The Good and Bad News from the Congressional Budget Office

WASHINGTON – The nation’s economy is purring along in a manner better than anticipated, according to a new report from the Congressional Budget Office, but the federal deficit is on track to expand in the not-too-distant future, potentially creating long-term problems unless some action is taken.

The good – and bad – news was contained in the most recent CBO report that asserted economic activity will “expand at a solid pace in 2015 and over the next few years -- reducing the amount of underused resources, or 'slack,' in the economy.”

CBO Director Doug Elmendorf told lawmakers this month that “increases in consumer spending, business investment and residential investment will drive the economic expansion this year and over the next few years.”

Growth in those categories of spending, he said, will “derive mainly from increases in hourly compensation, rising wealth, the recent decline in crude oil prices and a step-up in the rate of household formation as people are more willing and able to set up new homes.”

But an aging population, supported by fewer individuals of working age, is expected to lead to a growth in the deficit. By 2025, the CBO said, it will reach $1.1 trillion, even though this year’s expected deficit of $468 billion would be the lowest level as a percentage of the economy since 2007.

“The federal budget deficit, which has fallen sharply during the past few years, is projected to hold steady relative to the size of the economy through 2018,” Elmendorf told the Senate Finance Committee. “Beyond that point, however, the gap between spending and revenues is projected to grow, further increasing federal debt relative to the size of the economy—which is already historically high.”

Elmendorf, who is on shaky ground with the Republican majority in both congressional chambers, told lawmakers in both the House and Senate that the unemployment rate “will fall a little further and more people will be encouraged to enter or stay in the labor force.” But beyond 2017, he said, the CBO projects that gross domestic product will grow at a rate “that is notably less than the average growth during the 1980s and 1990s.”

Several factors are contributing to deficit growth beginning in 2018, Elmendorf said – the retirement of the baby boom generation, the expansion of federal subsidies for health insurance, increasing healthcare costs and higher interest rates on the federal debt.

“Consequently, under current law, spending will grow faster than the economy for Social Security, the major healthcare programs, including Medicare, Medicaid and subsidies offered through insurance exchanges and net interest costs,” Elmendorf said. “In contrast, mandatory spending other than that for Social Security and health care, as well as both defense and nondefense discretionary spending, will shrink relative to the size of the economy. By 2019, outlays in those three categories taken together will fall below the percentage of GDP they were from 1998 through 2001, when such spending was the lowest since at least 1940.”

Regardless, Elmendorf reported, revenues are projected to rise significantly by 2016, buoyed by the expiration of several statutes that reduced tax liabilities and by the ongoing economic expansion.

“Revenues from the individual income tax are expected to rise relative to GDP—mostly because people’s income will move into higher tax brackets as income gains outpace inflation, to which those brackets are indexed,” he said. “But those increases are expected to be offset by reductions relative to GDP in revenues from the corporate income tax and other sources.”

On the positive side, the CBO reported that implementing the Affordable Care Act, popularly known as Obamacare, will not prove as expensive as anticipated. Elmendorf said the law will cost $571 billion over the first 10 years of its existence – not the $710 billion cited in initial estimates.

The lower cost, Elmendorf said, can largely be attributed to a Supreme Court decision determining that states do not have to participate in the expansion of the Medicaid program. Lower health insurance costs also helped reduce the burden.

Sen. Bernie Sanders (I-Vt.), ranking member on the Senate Budget Committee, said the CBO analysis establishes that the nation’s economy “has come a very long way since President Bush left office in January of 2009.”

“At that time, we were hemorrhaging some 800,000 jobs a month, our financial system was on the verge of collapse and the deficit was $1.4 trillion,” Sanders said. “Today, the economy has made substantial progress. During the last reported quarter we saw very strong economic growth of 5 percent, and last month the economy created another 252,000 jobs. This is the 58th straight month of private sector job growth.”

But Sanders asserted the CBO report doesn’t tell the whole story.

“While we must continue to focus on the federal deficit we must also be aware that there are other deficits in our society that have been causing horrendous pain for the vast majority of the American people,” Sanders said. “These are deficits in decent-paying jobs, deficits in infrastructure, deficits in income, deficits in equality, deficits in retirement security and deficits in education.”

Sen. Mike Enzi (R-Wyo.), the newly installed chairman of the Senate Budget Committee, said he plans to restore “common sense and good budgeting to Washington.”

“Runaway spending habits have bred excessive deficits and incredible debt,” Enzi said. “As we meet this morning, our Federal debt totals over $18 trillion. Every man, woman, and child owes $56,000 on that debt.  Federal spending has hit a record high. Revenues are at historic heights. Yet every year we run deficits that are on track to hit nearly a $1 trillion.  The more deficits we have, the more debt we owe, the more that we add to the tab for future Americans as yet unborn. That just doesn’t seem right to me.”

Enzi vowed Congress will “act to control the spending, reduce the deficits and end the debt. We will act to restore balance to our budgets, certainty to our economy, and confidence to our constituents.”

On another touchy subject, Elmendorf told lawmakers that the CBO will adhere to a House rule to include "dynamic scoring" in analyzing major pieces of legislation. Dynamic scoring is intended to establish that tax cuts have a more positive impact on the nation’s economy than the CBO has previously held.

"We think it's natural for members of Congress to be interested in the macroeconomic consequences of major pieces of legislation,” Elmendorf said.