Monday, May 16, 2022

CBO Sounds a Warning of American Fiscal Ruin

A recent report from Washington could signal convulsive changes in policy—and it has nothing to do with abortion. The Congressional Budget Office’s latest analysis of what’s needed to put America’s fiscal house in order makes a compelling case for a return to fiscal sanity sooner rather than later.

CBO examined two scenarios for stabilizing federal debt (relative to gross domestic product) over 10 years. The first would gradually raise personal income-tax rates in equal proportion across the income spectrum. The second would gradually reduce benefit payments for Social Security, Medicare, Medicaid, and Obamacare. The budget gnomes analyzed each scenario with three different starting dates, with fiscal tightening beginning in 2026, 2031 or 2036.

Unsurprisingly, delaying the start of fiscal responsibility necessitates larger tax increases or benefit reductions. Postponing action until 2036 means debt wouldn’t stabilize as a percentage of the economy until the 2040s—and it would stabilize at levels 30 to 40 percentage points higher than current debt-to-GDP ratios. Delay poses another obstacle for stabilizing debt with tax increases rather than benefit reductions. Waiting until 2036 to impose a tax-increase regime would see debt balloon to 140% of GDP.

The CBO believes that stabilizing debt through tax increases would permanently shrink the economy by discouraging work and crowding out private investments that would improve productivity. Stabilizing debt through lower entitlement spending, by contrast, might lead people to work longer and would increase private saving, both of which would increase economic growth.

The CBO report demonstrates why Washington needs to rediscover its fiscal discipline. The dishonesty of Obamacare, which used Medicare payment reductions both to fund new entitlements and improve Medicare’s fiscal position, helped create the current crisis. By extending Medicare’s solvency on paper, the law’s accounting gimmickry allowed lawmakers in both parties to avoid any substantive discussion of reform for a dozen years.

Those days of blissful fiscal ignorance will soon end. By the next presidential inauguration, in January 2025, Congress will face a toxic brew of long-delayed budgetary decisions. The Medicare trust fund will face imminent insolvency, running ever-increasing losses projected at nearly $100 billion annually by the end of the decade. Many provisions of the 2017 tax reform will expire at the end of 2025. The military will need additional resources to respond to a more dangerous global environment. To top it off, the economy could face a recession, as the Federal Reserve’s failure to get on top of rising inflation could lead to an overcorrection in the years to come.

The American people know little about the magnitude of this impending crisis, in large part because a generation of politicians have proved singularly uninterested in educating the public about these inconvenient truths. The CBO report illustrates how a continued failure by our elected leaders to lead a movement for fiscal responsibility will cause the American people to pay the price for generations to come.

This post was originally published at The Wall Street Journal.