Hatch Says CBO Long-Term Budget Outlook A “Call to Action” on Entitlement Reform

Congress’ Budget Scorekeeper Finds America’s Debt, Fueled by Entitlement Programs, A Threat to Economic Growth, Private Sector Investment

WASHINGTON – U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, said today’s Congressional Budget Office’s (CBO) long-term budget outlook should serve as a call to action to take up meaningful structural entitlement reforms as a part of the debt ceiling negotiations. Earlier this year, Hatch introduced five bipartisan reform ideas that he has presented to President Obama, White House Chief of Staff Denis McDonough and Treasury Secretary Jack Lew.

“The White House would like the world to think that negotiating over the debt limit has never happened before – when, in fact, the President was negotiating over raising it just a couple of years ago. The White House would also like the world to think that the nation’s debt isn’t a problem – when, as CBO says today, our debt, fueled by the rapid growth of our entitlement programs, is on an unsustainable path. The White House would like everyone to believe that we just need a little more revenue, when CBO found that revenue will be higher than it’s been over the past four decades,” said Hatch. “There is no way to ignore these facts, but that’s what the White House appears to be doing. Earlier this year, I unveiled five bipartisan entitlement reform ideas that should be a part of any fiscal discussions this Fall. The time to get serious is now. America - our seniors, our children and grandchildren - can’t afford a White House that chooses to whistle past the grave yard of our country’s fiscal health and the tremendous weight that our debt is around the neck of a robust, long-term economic revival.”

CBO found that America’s debt is a threat to economic growth and private sector investment. CBO also says that federal entitlement programs are the chief source of America’s debt – reaching more than 14 percent of Gross Domestic Product (GDP) by 2038 – putting federal investments in other areas at serious risk. CBO found that revenue would be higher under current law than revenue has been over the past four decades.

Hatch’s five entitlement reform proposals, include raising the Medicare eligibility age from 65 to 67, modernizing the Medigap program, simplifying Medicare beneficiary cost sharing and establishing a catastrophic limit, allowing Medicare competitive bidding, and strengthening Medicaid program through per capita caps.

Below is an analysis by the Senate Finance Committee Minority staff on today’s CBO report:

While CBO warns of harmful effects of adding to our “already unusually high” federal debt, President Obama seeks a clean debt limit increase of an unspecified amount:
• CBO: “…because federal debt is already unusually high relative to GDP, further increases in debt could be especially harmful.”

Entitlements are the source of our long-term fiscal unsustainability.
• CBO: “Federal spending for the major health care programs and Social Security would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years.”

While the administration touts deficit reduction this year at the fastest “rate” since World War II, it should be kept in mind that such a result is not heroic. After having ramped up debt-fueled spending, on things like a failed “temporary” stimulus, the economy would crumble absent fiscal retrenchment.
• CBO: “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007.”

Despite the administration’s claims that our fiscal house is getting back in order this year, CBO makes clear that our long-term debt problem remains.
•   CBO: “CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.”

Social Security looks to be in even more trouble than CBO previously thought.
•   CBO: “The actuarial shortfall for the Social Security trust funds is estimated to be significantly larger than CBO projected last year. The CBO now estimates that the 75-year actuarial deficit for Social Security is 3.4 percent of taxable payroll, compared with the previous projection of 1.9 percent. That change reflects increases in expected longevity and the incidence of disability (which raise projected spending for benefits), the reduction in income tax rates (which reduces projected revenues credited to the trust funds), and other factors.”

Runaway entitlement spending will squeeze out discretionary programs, posing threats to a range of programs running from the supplemental nutrition assistance program (food stamps) to roads and bridges.
• CBO: “In contrast, total spending on everything other than the major health care programs, Social Security, and net interest payments would decline to 7 percent of GDP, well below the 11 percent average of the past 40 years and a smaller share of the economy than at any time since the late 1930s.”

Runaway debt carries interest-service obligations, which are projected to consume two-and-a-half times more of the economy under current law, requiring that the U.S. pay out interest to creditors, including foreign investors in China and Japan, rather than use our resources for domestic programs.
• CBO: “The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years, mainly because federal debt would be much larger.”

Runaway debt will crowd out productive private-sector activity, including private investment.
• CBO: “Increased borrowing by the federal government would eventually reduce private investment in productive capital, because the portion of total savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income in the long run than would otherwise be the case.”

CBO warns of several adverse effects of our unsustainable debt path, including:
•   “Federal spending on interest payments would rise, thus requiring larger changes in tax and spending policies to achieve any chosen targets for budget deficits and debt.”
•   “The government would have less flexibility to use tax and spending policies to respond to unexpected challenges, such as economic downturns or wars.”
•   “The risk of a fiscal crisis—in which investors demanded very high interest rates to finance the government’s borrowing needs—would increase.”

CBO identifies adverse economic effects of current law over the long run, including higher debt relative to the size of the economy, higher tax rates, reduced output, higher interest rates, and higher interest payments.
• CBO: “Incorporating the economic effects of the federal policies that underlie the extended baseline worsens the long-term budget outlook. The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline.”

o “Those economic differences would lead to lower federal revenues and higher interest payments. With those effects included, debt under the extended baseline would rise to 108 percent of GDP in 2038.”

CBO warns of adverse effects of yet more increases in taxes:
• CBO: “Additional revenues could be raised in many different ways, but to the extent that they were generated by boosting marginal tax rates (the rates on an additional dollar of income), the higher tax rates would discourage people from working and saving, further reducing output and income.”

CBO data make clear that, over the long-run, we do not face a revenue problem:
• CBO: “By 2038, total revenues would be a little less than 20 percent of GDP, CBO projects. Nearly all of the almost 3 percentage-point rise in total revenues as a percentage of GDP over the next 25 years would stem from increases in receipts from individual income taxes.”
• “Federal revenues would equal 19½ percent of GDP by 2038 under current law, CBO projects, compared with an average of 17½ percent over the past four decades.”

CBO data make clear that, under current law, taxes on the middle class are going to rise and taxes on labor and capital income will be far higher than even today’s high rates:
• CBO: “Under an extension of current law, the tax system would be markedly different in 2038 than it is now. Average tax rates would be considerably higher for households throughout the income distribution—in other words, taxpayers at all income levels would pay a greater share of their income in taxes than similar households do today.”
• “Moreover, the effective marginal tax rate on labor income (the percentage of an additional dollar of labor income paid in federal taxes) would be about 35 percent, as opposed to about 31 percent now, and the effective marginal tax rate on capital income (the percentage of an additional dollar of income from investments paid in federal taxes) would be about 19 percent, compared with about 16 percent today.”

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