Choices for Deficit Reduction: An Update

by Sabrina I. Pacifici on December 20, 2013

“In coming decades, the aging of the population, rising health care costs, and the expansion of federal subsidies for health insurance will put increasing pressure on the federal budget. At the same time, by 2020, if current laws generally remained in place, federal spending apart from that for Social Security and major health care programs would drop to its smallest percentage of total output in more than 70 years, and federal revenues would be a larger percentage of output than they have been, on average, during the past 40 years. Still, the rising cost of Social Security and the major health care programs would lead to widening deficits, CBO projects. Under those projections, federal debt held by the public would rise substantially over the long term as a share of the economy’s annual output—from 72 percent of output now to more than 100 percent of output 25 years from now—which would probably have significant negative consequences for the economy and reduce lawmakers’ ability to respond to unexpected developments.

Addressing that long-term challenge would require reducing future budget deficits. To accomplish that, lawmakers would need to increase revenues further relative to the size of the economy, decrease spending on Social Security or major health care programs from what would occur under current law, cut other federal spending to even lower levels by historical standards, or adopt some combination of those approaches. The amount of deficit reduction that would be needed would depend on lawmakers’ objectives for federal debt. For example:

  • Decreasing that debt in 2038 to just below 70 percent of output—slightly less than what it is now but still quite high by historical standards—could be achieved if deficits were reduced by $2 trillion (excluding interest costs) during the next decade, and the reduction in the deficit as a percentage of output in 2023 was maintained in later years.
  • Lowering the debt in 25 years to about 30 percent of output—which would be a little below the average over the past 40 years—could be achieved by reducing deficits by $4 trillion (excluding interest costs) during the next decade and maintaining that reduction in subsequent years.”

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