Recent budget developments seem to have sparked a panic. Tax cuts, the end of the defense-spending sequester, and a down payment on White House promises to refurbish the country’s infrastructure had already produced deficit estimates verging on $1 trillion for the next few years, even before a $300 billion bipartisan spending compromise was added to the mix. These trends are worrisome, but less so than other matters. Hardly mentioned in today’s debate are the budget-busting effects of entitlement spending in Social Security, Medicare, Medicaid, and (for the time being) Obamacare. Next to the burden of entitlements, the stuff of today’s debate looks like small beer.
Recent budget figures acknowledge that the 2017 tax cuts will slow revenue growth for this year and next. Projections show almost no revenue increase in 2018 and just 2.4 percent growth in 2019—contributing to deficits of close to $1 trillion a year during this time. Only later, after the economy’s expected response to tax relief, does robust revenue growth appear possible. On the expectation that the economy will grow about 3 percent a year in real terms, projections are for 6 percent to 7 percent revenue growth after 2020, enough to help produce a gradual decline in deficits toward $600 billion, about where the budget gap stood last year.
Critics have described these projections as unduly optimistic, but they seem plausible enough. In any event, “unrealistic” characterizes every budget ever issued. Of more concern is the fact that this long-running (if anemic, until recently) recovery is likely to stall into a recession sometime during the budget’s ten-year horizon.
It’s on the spending side, as always, that the trouble lies. The budget projections show strong 5.8 percent spending growth in 2018 and a 4.6 percent increase in 2019—bringing all government spending to $4.4 trillion, about $425 billion more than Washington spent in 2017. With the bipartisan compromise added in, the dollar increase would run higher, if Congress spends it all. Thereafter, projections see outlays expanding to just under $6 trillion by 2025, or more likely, $6.3 trillion with the recent compromise, assuming that Congress fails to return to the original baseline. That comes to a spending increase of $2.6 trillion between 2017 and 2025. The major spending burden, as always, comes not from discretionary budgeting but from entitlements spending.
Today’s budget headlines focus on four issues: infrastructure, the capacity for additional defense spending, the cost of the recent compromise, and the rising expense of servicing the outstanding debt. Of these, the end of the defense sequester and the down payment on the infrastructure plan add about $280 billion to spending that the government would not have otherwise budgeted, accounting for about 11 percent of the net increase in overall outlays. The $300 billion compromise would account for another 11.5 percent of the net increase. The cost of debt service is more complex; the Federal Reserve assumes that Treasury bill rates will climb to 3 percent over the next few years and that the yield on ten-year notes will rise to about 4 percent. These figures produce projections of $684 billion for debt service in 2025, some $425 billion more than in 2017. That accounts for some 16 percent of the overall jump in outlays.
Compare all this with the growth in entitlement spending, which has swelled for decades. In the last 20 years, entitlements have expanded from some 43 percent of federal spending to almost 70 percent in 2017. Nothing on the horizon even hints of moderation to this trend. On this basis, entitlements alone account for just under half the total spending increase. But the historic pattern actually understates the impact, since the retirement of the baby boom generation—combined with Obamacare—will likely accelerate this spending.
Whatever the cause, the budget picture indeed offers reason for concern. The accumulating deficits could add $6.6 trillion to our outstanding debt by 2025. Yet there is no cause for panic. Nominal annual income growth of 4 percent—an entirely plausible goal—would keep debt levels about where they presently stand, relative to national income. Of course, debt is too high, totaling more than the gross national product, but the place to look for relief is not in the headline-making line items—it’s in reforms that can slow the budget-busting growth of entitlement spending, which threatens to drown our economy.