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The missing ingredient

Wed Feb 10th, 2016

Thus far, all of the presidential candidates have omitted any discussion of the federal budget outlook, a not unimportant topic. During Obama’s initial run for president it was pretty easy to conclude that little of his wish list of contemplated goals would be achieved as the federal budget was in the process of plunging into deep deficit. There was simply no way to fund his new initiatives – the ACA perhaps being the only exception.  In the current election cycle, while no candidate from either party has laid out any “vision for the future,” it might be worth taking a look at a recent budget projection to see how much wiggle room a new president might have to achieve his or her agenda.

Last week the Congressional Budget Office released its updated 10-year budget projections. It’s not a pretty picture:

 Among the highlights: starting this year, the deficit as a share of the economy will increase for the first time since 2009; the CBO estimates that by 2026 publicly held debt as a share of GDP will rise to 86%, more than double the average of the last five decades, and the highest since the end of WWII. The aging population and rising costs of health care/social security will be the primary drivers of future deficits and the swelling of the national debt. The CBO sees revenues as a percent of GDP remaining stable at 18% over the ten year horizon while outlays will rise from a 50-year average of 20% to 23.1% in 2026, with annual deficits topping $1 trillion starting in 2022. The CBO concludes: “By 2027, 100% of the federal revenue collected will go toward interest payments and ‘mandatory spending’* leaving no room for spending controlled though the annual appropriations process, which includes investments in domestic priorities as well as national defense.”  (Perhaps there is a bright side to this – Congress, with nothing to do, could go home?)  For those interested in the details, First Budget, a new joint effort of the Concord Coalition and the Campaign to Fix the Debt, has a report out on this topic available at

Although it seems pretty certain that the tsunami of an aging population and related mandatory spending** will continue to roll forward, this doesn’t mean the CBO’s projections are cast in stone – or that it has been on the mark in the past.   After the budget surplus achieved in Clinton’s last year in office the CBO fell victim to extrapolationitis.  It predicted continuing surpluses, projecting paydown of  the federal debt by 2010.  During the late 1990s the debt markets began to worry about the same outcome - a dearth of Treasury securities. Goldman published a report in July 2000 titled “Implications of a Disappearing Treasury Debt Market” that warned of the dire consequences of a world with no Treasuries available for private investors.  This “fear” was one of the under appreciated drivers in the growth of subprime and other assorted junk securities, and Wall Street stood ready and able to fill the anticipated vacuum of Treasury debt. 

Although the federal deficit as a percent of GDP has declined around 75% during the Obama administrations (not something I’m giving him personal credit for as the drop was a combination of rising tax receipts and the sequester process), if the CBO’s projections are near correct any future administration will be held captive by these numbers. (While the Federal government has significantly slowed its debt creation, the debt in the private sector and the central banks have ballooned - the numbers are quite terrifying. Read David Stockman’s blog to get totally depressed!)

Outlays for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance  Program, plus subsidies for health insurance purchased through exchanges and related spending, are expected to be $104 billion (or 11 percent) higher this year than they were in 2015.

** The cost of the VA is now an important part of this yet-to-crest mandate wave: The VA’s budget in 2002 was $53.1 billion, $168.8 billion this fiscal year. If memory serves, 25% of the veterans of the Gulf War claimed disability, but 45% of those in Afghanistan-Iraq are claiming. Not only are these percentages much higher than WWII or Vietnam-era vets, but conditions claimed averaged 2.3 for WWII survivors, 6 for Afghan-Iraq vets.  This cost curve has a long way to go; war, the gift that keeps on giving.