Long-run Budget Projections of 2005 Budget Policy

Budget of the United States Government, Fiscal Year 2005 ^ | 2-11-04 | R. Davis

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In the recently released budget, there is a section that contains long-run budget projections through 2080. Graphs and tables summarizing those projections can be found at:

http://home.att.net/~rdavis2/pro2005.html

Also on that page are the following points that can be drawn from the data:

1) Projections of the long-run public debt have risen steadily over the previous three budgets. In the 2005 Budget, this trend continues in the shorter term with the projection of the public debt in 2010 being 10.1% higher than it was in last year's budget. Over the longer term, however, the public debt is projected rise slightly less quickly than was previously projected resulting in it being 7.3% lower in 2080 than was projected in last year's budget.

2) Despite the slight improvement in the longer term outlook for the public debt, the cost of Medicare is projected to rise sharply and to be 34.4% higher in 2080 than was projected in last year's budget. The budget states (on page 192 of the Analytical Perspectives):

"The projections for Medicare over the next 75 years are based on the actuarial projections in the 2003 Medicare Trustees' Report, as adjusted for the effects of the Medicare prescription drug and modernization bill enacted in December 2003."

3) From 2020 on, the higher projections for Medicare costs are offset by lower projections for other spending. From 2040 on, Medicare projections are also offset by higher projections for receipts.

Looking at the one-year change in projections for 2080, Medicare has risen 3.2% of GDP but is almost exactly offset by a 2.3% of GDP increase in receipts and a 0.9% of GDP decrease in Medicaid spending. Beyond this, decreases of 0.6% of GDP in Discretionary spending, 0.3% of GDP in Social Security, 0.3% of GDP in other Mandatory spending, and 0.7% of GDP in Net Interest are projected to cause the deficit to be 1.9% of GDP less than was projected in last year's budget.

4) Discretionary spending from 2020 on is projected to be 0.6% of GDP less than was projected last year despite the fact that it is still assumed that it will grow with GDP over the long-run. This is because all assumptions through 2014 match those of the current budget and the growth with GDP begins only after that. The President's proposals are now projected to decrease discretionary spending from the 6.3% of GDP level that it was at in 2000 to 5.4% of GDP in 2014. The prior budget proposed to decrease it only to 6.0% of GDP.

5) Starting in about 2010, receipts are projected to increase about 0.5% of GDP every 10 years. Until then, they are projected to increase even faster. As can be seen in the table at def05.html, receipts are projected to reach a low of 15.7% of GDP in 2004. They are then projected to rise 1.2% of GDP by 2005 and an additional 1.0% of GDP by 2010.

In 2080, receipts are projected to reach 21.6% of GDP. As can be seen in the above-mentioned table, this will be the highest that receipts have been since at least 1940. The previous high was 20.9% of GDP, reached in 1944, during the Second World War, and in 2000.

These points, in turn, raise the following questions:

1) Receipts have varied between 16 and 20% of GDP during all but three years since 1946 and have shown no obvious long-term trend up or down. What has changed that they are now projected to rise steadily through 2080?

2) What are the reasons that the projected costs of Medicare have risen but the projected costs of Medicaid has dropped? The new drug benefit, of course, may be one. Are there others?

3) How likely is it that the government will be able to cut discretionary costs from 6.3 to 5.4% of GDP by 2014 considering that this includes defense and homeland security spending?

In short, I have some question as to whether some of the long-run projections may be too optimistic, at least compared to last year. In any case, the most important point is that, like the past several years, the budget itself projects that the federal debt is very much on an unsustainable path.