Budget watchers Alan Auerbach and Bill Gale have just finished a new paper on the nation’s long-term fiscal future. I’ll get to the numbers in a second, but their conclusion could hardly be more grim: “The federal fiscal outlook is both bleak and uncertain.”
And if that doesn’t get your attention, try this: Auerbach and Gale note a “discernable uptick” late last year in market fears of default in 5-Year Treasury notes. Have a nice day.
I understand that worrying about deficits these days is as fashionable as rabbit ears and Hummers, but Gale and Auerbach have undertaken a valuable exercise. Gale, a co-director at TPC, and Auerbach, an economics professor at Berkeley, have run these numbers in past years. But they have never, ever, come out with results like this.
Starting with CBO estimates of the fiscal future, Bill and Alan make a series of more realistic assumptions about what is likely to happen to both spending and taxes as long as Washington continues on its current fiscal path. Their conclusions: Deficits averaging more than $1 trillion-a-year through 2019, a fiscal gap of between 7 percent and 9 percent of Gross Domestic Product, and deficits not seen in fifty years. And that’s if the economy recovers quickly.
Auerbach and Gale see government spending surging to nearly 26 percent of Gross Domestic Product this year even as tax revenues plunge to barely 16 percent of GDP. To put that in perspective, we haven’t spent so much since World War II, and only once since 1950 has Washington collected such a paltry amount of tax. This may be necessary in the current recession, but it is not sustainable over the long run. My math skills have never been very good, but even I can figure out that you can’t pay for 26 percent of GDP with 16 percent for very long.
Over the long run, they figure this astronomical level of spending will shrink temporarily as the economy returns to normal, but outlays will grow steadily again as the Boomers age. Tax revenues will also recover a bit, but they’ll never get much higher than 17 percent of GDP.
What’s even scarier is that Auerbach and Gale came to their Doomsday scenario with fairly conservative projections of spending and taxes. While they include the cost of the new stimulus, they do not count the price of the just-announced housing plan. They also assume there will be no additional bailout spending beyond what Congress has already approved for the banks and other troubled industries.
They figure that discretionary spending (that is, for most government programs except for Medicare, Medicaid, and Social Security) will grow at a pace roughly equal to inflation and population. That is substantially slower than it increased during the Bush years.
Similarly, they assume that Medicare spending will be restrained by capping physician payments—something that the law requires but which is unlikely to happen.
While they figure that the 2001 and 2003 Bush tax cuts will be extended, they assume that the stimulus tax cuts (except for AMT relief) will expire. However, the chances are that many won’t, and TPC figures that extending just three popular stimulus tax cuts—the Making Work Pay Credit, the Earned Income Credit, and the Child Credit--would add another $1 trillion to the deficit over the next 10 years.
What would it take to close the staggering fiscal gap Auerbach and Gale foresee? Well, we could permanently cut all government spending by 23 percent. Or we could raise income taxes by 50 percent and eliminate all discretionary spending. The Obama Administration has planned a White House summit next week to map out ways to tackle long-term deficits. The participants will have their work cut out for them.
