STAFF ANALYSIS OF THE CONGRESSIONAL BUDGET OFFICE’S

"Political differences shouldn't prevent us from taking bold, decisive action to address America's dire financial outlook. Republicans and Democrats agree that being $18 trillion in debt today and facing the prospect of spending more than $800 billion a year on interest payments alone does not lend itself to a prosperous future for our country. CBO's numbers only reinforce this notion. The longer we postpone reforms and put off making tough decisions, the deeper the hole we have to climb out of. Let's not miss the opportunity before us to start down a new path and address our problems head on." - Chairman Mike Enzi

"America remains on a financially unsustainable path that threatens the future stability, security, and prosperity of our economy. Interest on the debt alone will consume $5.6 trillion of federal spending over the next decade. We have a duty to prevent a clear and present danger, and that means we must take steps now to balance the budget." - Sen. Jeff Sessions

"The new projections released by the CBO should serve as a stark reminder that our country is on an unsustainable economic path. The longer we wait to act, the more difficult it will become to put in place real reforms to control spending and reduce our over $18 trillion national debt. This dangerous level of debt remains a drag on the economy and job growth and will only worsen over time if Washington continues to irresponsibly add to the credit card." - Sen. Mike Crapo

"This latest CBO report indicates that we're headed down an unsustainable path that will put a damper on economic growth and hurt American workers. When a nonpartisan organization like the CBO says that Americans will pay more taxes yet our deficits will rise, something needs to be done. It's crucial that we get our spending and deficits under control so we can grow our economy and give job creators the certainty they need to expand and hire more workers." - Sen. Rob Portman

"With $18 trillion in debt and the growth of entitlement programs skyrocketing, it is clear the federal government's current fiscal path is unsustainable. A sluggish economy makes the problem even worse. CBO has warned that this situation could persist if no action is taken. Controlling debt requires making smart choices on spending as well as enacting policies that encourage stronger economic growth." - Sen. Roger Wicker

"I didn't come to Washington to sit idly by as lawmakers in both parties pretend the deficit is shrinking and that our national debt is not a concern. We have a genuine fiscal crisis on our hands. We're already handing our kids and grandkids a national debt of over $18 trillion and tens of trillions of dollars of unfunded liabilities for entitlement programs. The latest CBO report shows that the deck is stacked to get even worse. We need a sense of urgency to seriously tackle our national debt because of the threat it poses to our economy and national security. As a member of the Budget Committee, I look forward to working with Senate Budget Chairman Mike Enzi and House Budget Chairman Tom Price in the pursuit of a budget that reflects the tough decisions necessary to eliminate wasteful spending, prioritize our resources, and grow the economy." - Sen. David Perdue

Summary

CBO projects that the government will collect $3.2 trillion in revenue and spend $3.7 trillion this year, resulting in a deficit of $468 billion in FY 2015 ($15 billion less than recorded in the prior year). Based on current law, CBO projects that the country's fiscal situation will remain relatively stable for the next few years. After FY 2019, however, CBO projects steadily increasing levels of deficits, debt, and interest payments. By the last year of the budget window, FY 2025, deficits will again surpass the $1 trillion mark, debt held by the public will reach $21.6 trillion, and a single year's interest payments will total $827 billion.

According to CBO, federal outlays will total $3.7 trillion in FY 2015, or 20.3 percent of GDP-- slightly higher than the 20.1 percent 50-year historical average. Federal outlays are expected to grow to reach $6.1 trillion, or 22.3 percent of GDP by FY 2025, while revenues are expected to remain steady at about 18 percent of GDP. Spending is projected to increase by 2 percentage points of GDP over the budget window. Mandatory spending (primarily Social Security and health care spending) will account for 1.7 percentage points of the increase; net interest costs will contribute another 1.7 percentage points; and discretionary spending will account for a reduction of 1.4 percentage points.

CBO projects federal revenues will total $3.2 trillion in FY 2015, or 17.7 percent of GDP--slightly above the 50-year historical average of 17.4 percent. Under current law, total revenues will rise significantly in 2016 to $3.5 billion (18.4 percent of GDP) due mainly to the expiration of business tax provisions that were allowed to lapse at the end of calendar year 2014. After FY 2016, revenue collections will remain steady at approximately 18.1 percent of GDP throughout the duration of the forecast period. In total, over the 10-year budget horizon (FY 2016-2025), CBO expects the federal government will collect $41.7 trillion in revenue.

Deficits

Over the period FY 2016-2025, annual spending will outpace tax collections by a cumulative total of $7.6 trillion.

For the budget year (FY 2016), CBO projects a deficit of $467 billion. Spending will total $3.9 trillion, while revenues total $3.5 trillion. Deficits will begin to climb after FY 2016, reaching $1.1 trillion by FY 2025. Deficits will remain relatively flat at around 2.5 percent of GDP from FY 2015 through FY 2018 (slightly below the 50-year average of 2.7 percent of GDP), then rise steadily to 4 percent of GDP by FY 2025.

Debt And Interest

CBO projects that debt held by the public will follow a similar path as deficits, remaining relatively stable at about 74 percent of GDP in the near term and then rapidly growing to nearly 79 percent of GDP by FY 2025. In dollar terms, debt held by the public would increase from $13.4 trillion in FY 2015 to $21.6 trillion in FY 2025, a nearly 62 percent increase. CBO notes that while the federal debt increase over the projected window seems modest, it is already high by historical standards--with debt remaining greater relative to GDP than at any other time since the years immediately following World War II.

Gross debt, which includes Treasury securities held by federal trust funds, will also continue to rise according to CBO. By the end of FY 2015, CBO projects a gross debt of $18.5 trillion. This number will grow to $27.3 trillion by the end of FY 2025, an increase of 47.7 percent. Gross debt grows less rapidly than public debt because Social Security begins redeeming bonds at a rapid rate toward the end of the projection period.

According to CBO, carrying these high levels of debt has negative consequences for the federal budget and the U.S. economy, including increased government borrowing crowding out private borrowing and leading to increased costs of borrowing for businesses, limits to the ability of the government to respond to crises with tax and spending policies, and increased interest payments.

The federal government is expected to spend $227 billion on interest payments in FY 2015, or about 1.3 percent of GDP. These interest payments will increase to $827 billion (3 percent of GDP) by FY 2025, an increase of 264 percent. These interest costs, a product of continuing to carry such a high debt burden, will put a strain on federal resources and begin to crowd out other priorities. For instance, net interest costs will surpass base defense discretionary spending within six years.

Discretionary Spending

CBO estimates that discretionary outlays will increase from $1.2 trillion in FY 2015 to $1.4 trillion in FY 2025. Discretionary spending, unlike mandatory spending, is limited by spending caps imposed by the Budget Control Act of 2011 (BCA) through FY 2021 (these caps permit discretionary spending to grow at a rate less than CBO's GDP projection). Discretionary spending will fall from 6.5 percent of GDP in FY 2015 to 5.1 percent in FY 2025. Under current law, the FY 2016 cap for defense spending is $523.1 billion in budget authority (BA) (a $1.8 billion increase from FY 2015's cap) and $493 billion BA (a $631 million increase from FY 2015's cap) for non-defense.

CBO's discretionary projections include extrapolations for discretionary spending that are not limited by the BCA, most notably funding for overseas contingency operations (OCO). Under baseline construction rules, CBO projects unconstrained discretionary spending to grow at the rate of inflation annually from its last appropriated level. As such, CBO's Outlook contains $822 billion in projected OCO budget authority over the FY 2016-2025 period, with associated outlays of $721 billion.

Other items exempt from the spending limits and extrapolated in the baseline include disaster relief funding ($66 billion BA over 10 years), emergencies (response to Ebola, $61 billion BA), and program integrity initiatives to reduce improper payments ($18 billion BA). Outlays flowing from this budget authority totals $92 billion over the FY 2016-2025 period.

Mandatory Spending (Non-Interest)

CBO estimates that mandatory spending will increase from $2.3 trillion in FY 2015 to $3.9 trillion in FY 2025. Mandatory spending will increase from 12.5 percent of GDP in FY 2015 to 14.2 percent of GDP by FY 2025.

Major Health Programs The mandatory health programs (Medicare, Medicaid, CHIP, and the exchange subsidies under the President's health law) account for 44.9 percent of total mandatory spending in 2015 and 48.8 percent in FY 2025. CBO expects net spending on Medicare to grow by 6.4 percent per year, or from $523 billion in FY 2015 to $976 billion in FY 2025. Spending on Medicaid, CHIP, and the exchange subsidies also is expected to grow by 6.4 percent per year, or from $390 billion in 2015 to $725 billion in FY 2025. The economy is expected to grow by 2.3 percent per year over this period.

In addition, CBO reduced its projections for the net cost of the coverage provisions of the Affordable Care Act by $101 billion over the FY 2015-2024 period. However, the gross cost of the coverage provisions was reduced by only $9 billion over that same period. That said, the net reduction is largely driven by three factors:

First, about 2 million more people are now expected to lose their employer-sponsored coverage, a benefit loss which for some employees will be partially offset by an increase in compensation in the form of taxable wages--which increases revenues by $97 billion;

Second, more people than expected are choosing bronze plans, which reduces spending on the cost-sharing subsidies by $39 billion; and

Three, the total cost of the premium tax credits fell by $28 billion as 1 million fewer people are expected to enroll in exchange-based coverage.

Also included in the net cost of the coverage provisions is an increase in Medicaid spending of $59 billion as more people are eligible for the program (about half of the increase is due to the expiration of CHIP funding, causing more children to go into Medicaid).

Income Security Spending on mandatory income security programs is expected to remain relatively stable over the next six years as the economy continues its modest recovery, averaging $314 billion during that period before increasing again to $355 billion by FY 2025. The primary drivers responsible for the increase in spending over the next 10 years are the Supplemental Security Income program, child nutrition, and unemployment compensation.

Social Security Disability Insurance At the end of FY 2014, the Social Security Disability Insurance (DI) trust fund had a balance of $70 billion. In FY 2015, CBO estimates that expenditures from the DI trust fund will total $148 billion while payroll tax revenues into the trust fund will total $115 billion. By FY 2025, expenditures on DI will total $221 billion and the program will be running an annual deficit of $51 billion. Given the cash flow deficit, CBO expects the DI trust fund to be insolvent in FY 2017.

Highway Trust Fund The Highway Trust Fund (HTF) includes the Highway Account, which funds roads and bridges, and the Transit Account, which funds mass transit. CBO expects spending to exceed revenues by $14 billion this year, as outlays will total $53 billion and revenues only $39 billion. CBO assumes that future limitations on obligations will be equal to amounts set for FY 2015, adjusted annually for inflation. Under those circumstances, and without further legislative action, the two accounts would be unable to meet all obligations in a timely manner at some point in FY 2015 and the fund's balance would be exhausted in early FY 2016. CBO's baseline estimates assumes that the trust fund can run deficits; as such, CBO projects that by the end of FY 2025 the trust fund will have a shortfall of $168 billion.

Revenues

The individual income tax is the largest source of federal revenue, and CBO predicts that the government's reliance on individual income tax collections will only increase over the forecast period. Wage growth that outpaces inflation will lead to "bracket creep," and the growing number of retired baby boomers receiving distributions from tax-deferred retirement accounts will accelerate the rate of growth in individual income tax receipts. As a consequence, individual income taxes will provide 48 percent of total revenue in FY 2016 ($1.6 trillion) but nearly 52 percent of total federal revenues in FY 2025 ($2.6 trillion). As a percent of GDP, individual income tax receipts will rise from 8.3 percent of GDP in FY 2015 to 9.5 percent in FY 2025. Between FY 2016 and FY 2025, CBO estimates the federal government will collect a total of $21.0 trillion in individual income tax receipts.

Receipts from payroll taxes--revenues that support Social Security, Medicare, unemployment insurance, and certain federal retirement programs--are expected to grow from $1.1 trillion in FY 2016 to $1.6 trillion in FY 2025, but will fall as a percent of GDP (from 5.9 percent to 5.7 percent). This is because CBO predicts a disproportionate share of wage growth will materialize at income levels above the wage cap for Social Security. Between FY 2016 and FY 2025, CBO predicts the federal government will collect $13.2 trillion in payroll taxes.

Similarly, CBO expects corporate income tax receipts will ebb in the face of lower profits. After surging from 1.8 percent of GDP in FY 2015 to 2.3 percent in FY 2016 (due to the expiration of temporary tax breaks), CBO predicts corporate tax receipts will revert to the long-term trend of 1.9 percent of GDP by FY 2025. Between FY 2016 and FY 2025, CBO predicts the federal government will collect $4.6 trillion in corporate tax revenue.

CBO's Economic Outlook

The top-line economic estimates from this year's economic outlook are substantially lower than last year's. CBO now estimates inflation-adjusted GDP to grow by 2.9 percent in 2015, which is down from last year's forecast of 3.4 percent. The agency also sees 2016 growing by 2.9 percent. After 2016, growth rates slow: CBO projects real GDP to grow by 2.5 percent in 2017, by 2.1 percent in 2018 and 2019, and by 2.1 percent from 2020 through 2025. All of these growth rates are lower than last year's estimates.

Even these reduced growth rates represent a stronger pace of economic activity than over the past seven years. CBO sees the utilization of "slack" economic resources, primarily in labor markets, as the fuel of the short-term boom in growth. The persistent "output gap" that the economy has struggled to close since the end of the recession should be closed completely by the middle of 2017, according to the 2015 Outlook.

It is worth noting that CBO also has reduced its estimates of potential output. The long-run annual potential output of the economy measured over the period 1950 through 2014 is estimated to be 3.3 percent real (inflation-adjusted) growth per year. This level, however, may be gone forever. For the period 2008 through 2014, CBO estimates annual potential output growth at 1.8 percent; and, for the period 2015 through 2025 (the current budget window), potential output is estimated at only 2.1 percent. Much of this decline is attributed to demographic shifts, the persistence of long-term unemployment, and high labor force drop-out rates.

expects the unemployment rate to drop to 5.5 percent by the end of 2015, and to decline slightly thereafter to 5.4 percent, which it views as the natural rate of unemployment (or the rate at which demand for labor is met without strong upward pressures on wages and prices). While these unemployment levels are striking improvements over the 2010 through 2013 period, they mainly reflect the end of labor supply "slack" and the slowing in the growth of the labor force. Monthly job growth will decline from 184,000 in 2015 to 69,000 in the 2018-2019 period, before increasing to a monthly rate of 111,000 for the last five years of the forecast window.

This subsidence in the monthly growth of the labor force is accompanied by the steady decline in the labor force participation rate: by the end of 2015, 63 percent of the civilian population aged 16 and above will either be working or looking for work, and by 2025 this percentage will have fallen to 61 percent. The percentage of the population aged 16 and above that will be employed will fall from 59 percent in 2015 to 57 percent in 2025.

CBO expects key interest rates to begin rising, not only because the Federal Reserve will end its low interest rate policy but because of upward pressures on interest rates due to economic growth at the economy's potential rate. The interest rate on the bellwether 10-year Treasury note is projected to increase from an average rate of 2.5 percent in 2014 to 4.6 percent by 2025. The 3-month Treasury bill rate jumps even faster than this doubling in the 10-year note. The bill rate is expected to average 0.2 percent in 2015 before ballooning to 3.5 percent in 2018. It will average 3.4 percent thereafter.

This sharp increase in interest rates is not, however, accompanied by an equally large increase in prices. CBO expects core inflation rates to grow modestly, but not to exceed the target rates set by the Federal Reserve: about 2.0 percent for the Personal Consumption Expenditure price index and 2.4 percent for the Consumer Price Index

Read this original document at: http://www.budget.senate.gov/republican/public/index.cfm/files/serve/?File_id=ab0d4f6d-da7a-4387-92df-84bd4fbc8b82