We have an enormous federal budget problem. We have $16 trillion in debt, growing at over $1 trillion a year for several years and apparently indefinitely into the future. It is being financed at very low, unprecedently low, interest rates. Demographic forces are causing the main drivers of the deficit, federal health care and social security spending, to grow rapidly. And the Administration appears to have no serious commitment to addressing these problems. A minor tax increase won’t make even the smallest dent. Health care is the worst part of the problem and a Congressional Budget Office presentation explains how they make long term Medicare and Medicaid spending projections and what those look like. (CBO Report) The CBO must always do projections based on the current law, but also conducts alternative simulations. The projections have two components, one is the next ten years which has a detailed set of underlying financials and the second has a longer time horizon and relies more on an actuarial and microsimulation model.
If current law stays in place (current law is the return of Clinton-era tax rates and cuts in spending) spending for federal health care programs would grow from 5% of GDP to 10% in 2037 and would continue to increase after that. And CBO continues to make what might be considered unrealistic projections of GDP growth. If some of the current tax rates are retained and spending is not constrained, things get much worse more quickly. CBO uses a notion of “excess cost growth” to estimate health spending growth. This is the increase in health spending per capita over the increase in potential GDP per person. Excess cost growth has declined over the past four decades, but is still averaging a healthy 1.6%. It is obvious than when any category of government spending exceeds GDP growth over a long period of time, eventually it eats up a very large portion of GDP, with likely bad effects on GDP growth. CBO is assuming that the excess cost growth in federal health spending must decline in the future. If it doesn’t, we are really in for a wild ride.