Correcting CBO and touting some fiscal oxygen

June 22nd, 2015 at 6:21 am

I wanted to weigh in briefly on this little dust up re some recent CBO analysis. My colleague Richard Kogan pointed out that while the CBO’s recent long-term budget analysis was as sound as ever, the opening sentence was very wrong:

“The Congressional Budget Office’s (CBO) new report on the budget picture opens by saying, “The long-term outlook for the federal budget has worsened dramatically over the past several years,” blaming the Great Recession and the steps taken to address it. But CBO’s own data, in that very report, show that’s not the case. The CBO data that allow an apples-to-apples comparison of its new projections with its earlier ones from before the recession show that the long-term budget picture has improved significantly, not worsened.”

Paul Krugman amplified this message last week.

Probably the easiest way to see Richard’s point, though it’s not as accurate as the figure he shows (i.e., it’s not CBOs work; it’s our own, but it amounts to the same thing), is to look the evolution of CBPP’s long term projects as in the first figure here (shown below). There we show the 2040 debt projected to be around 100% of GDP by 2040 vs. over 200% from our projection a few years back.

cbpp_ltbo

One reason for that improvement—not the only one, but a big one—is the decline in government spending on health care, due in large part to the fact that the growth of health care costs has slowed significantly in recent years, which is in turn partially due to health care delivery efficiencies enforced by the ACA.

The figure below, from another new CBO release, shows the persistent decline in their estimates of budget impact of the ACAs premium subsidies, driven both by the decline in costs and reductions in their guesstimates of how many people will purchase coverage through the exchanges (assuming the federal gov’t led exchanges in 34 states survive the SCOTUS).

hc_costs

Source: CBO

Since our strongest fiscal pressures are coming from the combination of aging demographics and rising health costs, this development is creating some much needed fiscal oxygen. From our long-term analysis: “in January 2010 we projected that Medicare and Medicaid together would cost 11.1 percent of GDP in 2040, but we now project that Medicare, Medicaid including the [ACA] expansion, CHIP, and the new marketplace subsidies will together cost 7.7 percent of GDP, or about 30 percent lower than the previous estimate.”

Now, let’s not get too carried away here. First, as Krugman says, long-term budget projections are a uniquely boring sub-genre of science fiction. Second, the path you see in our long-term projection is not sustainable. You still want to be a CDSH and while fiscal rectitude doesn’t imply balanced budgets, austerity, or the reckless cuts of sequestration, it does require debt rising more slowly than GDP in a strong economy. The analysis also implies that the costs of repealing the ACA or for that matter, landing the wrong way on King v. Burwell, will suck a lot of that oxygen out of the fiscal room.

The bottom line is that in part due to a more favorable health cost trajectory than we expected, we have some time to build on this progress. Or, we can mindlessly squabble about whether or not to keep the lights on.

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