Health entitlements threaten US long-term growth

Here’s the scary news:

“In December 2007, the Congressional Budget Office (CBO) published The Long- Term Budget Outlook, which presented a long-term projection of the budget under an ‘alternative fiscal scenario,’? representing one interpretation of what continuing today’s underlying fiscal policy would mean. CBO projected that, under that scenario, spending on Medicare, Medicaid, and Social Security would rise rapidly, and federal outlays excluding interest (primary spending) would climb from about 18 per- cent of GDP in 2007 to 28 percent in 2050 and to 35 percent in 2082… Because the scenario also assumes that revenues as a share of GDP would not increase much over the 75-year period, CBO projected that the federal budget deficit and federal debt held by the public would rise sharply. By CBO’s reckoning, federal debt under that scenario would climb from about 37 percent of GDP in fiscal year 2007 to more than 290 percent in 2050—a large figure by any standard. Since the founding of the United States, federal debt surpassed 100 percent of GDP only for a brief period during and just after World War II…”

The remedy? Tax rate hikes alone are infeasible:

“…tax rates would have to be raised by substantial amounts to finance the level of spending projected for 2082 under CBO’s alternative fiscal scenario. With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double.”

So some mixture of tax increases and reductions in health care entitlements will be necessary to avoid a serious blow to economic growth.

Because Congress holds the key to long-term fiscal balances in the USA, setting tax rates and entitlements, they will be responsible for passing the laws needed to avoid the problems. But more than half of the Members of Congress must stand for election every two years: they seem to have more incentive for short-term management of the budget than any other popular assembly on earth. They could not agree to deal with a deteriorating funding outlook the Social Security system in 2005-6. So what is the outlook for the more pressing health care deficit?

I found the reference to the CBO projections on Greg Mankiw’s blog.

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