A sober analysis of Congress’ drunken spending

Keith Hall, who is to Washington D.C. what a teetotaler is to a frat party, is not one for hyperbole.

When the director of the Congressional Budget Office explains the debt projections the agency is forecasting over the next decade, he doesn’t use words like “crippling” or “death spiral,” as some fiscal hawks do.

The $29 trillion the CBO is projecting the country will owe by 2028 will be nearly 100 percent of GDP, or more than double the 50-year historical average, and the highest since World War II. Prior to the 2008 financial crisis, the debt-to-GDP ratio was 35 percent.

In fact, Hall won’t even go so far as to call the situation a crisis.

“We have significant budget challenges over the next 10 years and beyond,” said Hall in a press call hosted by the Committee for a Responsible Federal Budget. “But I would not characterize it as a crisis.”

Perhaps he’s not allowed to use the word. As the ninth-appointed director of the CBO, Hall and the 235 economists and policy wonks he leads are not allowed to show a trace of political leaning.

Hall and the CBO are not without their critics—Larry Kudlow, director of the White House’s National Economic Council, claimed the agency is “always wrong” when modeling the impact of tax cuts on the budget.

But there can be no disputing the agency’s productivity. In 2017, CBO published 740 formal cost estimates of legislation that emerged from Congressional Committees, as it was required to do by law. Thousands of other informal estimates, and countless hours of technical assistance to staffers during the draft stage of lawmaking was still not enough output to come close to meeting all of lawmakers’ requests for assistance.

“Demand for our work is high,” says Hall.

‘This would be a good time to run a surplus’

There was some good news in the CBO’s annual 10-year projection report, released last month.

The tax cuts passed this year will spur impressive near term GDP growth of about 3 percent in 2018 and 2019, but it will taper, dropping to 1.5 percent by 2022.

CBO is also projecting higher wages, improved productivity, and an increase in the labor participation rate. Businesses will spend more money with tax savings. Higher wages, and new flows of tax revenue from baby boomers’ tax deferred retirement accounts, will increase the government’s coffers by 2028, when revenue is expected to be 18.5 percent of GDP. The historical average is 17.4 percent.

But it won’t be nearly enough to offset spending, says CBO. Annual deficits are set to exceed $1 trillion after next year for the foreseeable future. Rising interest rates, which will increase the cost of servicing the country’s debt, and outlays for Social Security and Medicare will conspire to absorb more than 80 percent of the country’s budget.

As for Republican lawmakers’ and the White House’s claims that its $1.5 trillion tax cut will pay for itself, Hall acknowledges that stronger growth from tax cuts will make deficits less exorbitant. Still, they will fall far short of offsetting lost revenue.

“They will pay for about one-third of themselves,” he said of the tax cuts. As the country nears full employment, and demand for labor is expected to increase, Hall implied that there would be no time like the present to address the budget imbalance. “If one were serious about addressing the debt, this would be a good time to run a surplus.”

Social Security, Medicare, and Interest payments set to blow up

Mandatory spending on retiree entitlement programs will drive the growth in spending, according to CRFB’s analysis of CBO’s projections. Social Security will account for a 27 percent increase in spending, and Medicare another 23 percent increase.

CBO projects the Federal Reserve will increase interest rates through 2021, when the yield on the 10-year Treasury note will be over 4 percent. Rising rates will account for 21 percent of the projected spending growth. Almost all other major areas of the budget are shrinking relative to the economy, according to CRFB.

All of this, of course, will depend on the accuracy of CBO’s projections. GDP growth will slow after 2019. The agency is forecasting between 1.5 percent and 2 percent growth between 2020 and 2028, comparable to other private sector estimates.

The White House’s Office of Management and Budget is projecting considerably more robust growth. CBO and OMB projections are reasonably in line through 2019. But by 2020, they diverge dramatically. CBO is projecting GDP will be 2 percent then, while the OMB is forecasting 3.1 percent growth.

Budget estimates are “inherently uncertain,” acknowledges Hall. But the CBO’s record on spending and revenue projections has proven to be “awfully accurate.”

How accurate will CBO be this time around? The answer may come just in time for the 2020 election season.