Tuesday, January 26, 2010

CBO report on budget outlook

CBO released a report on the budget outlook for the next 10 years. It is basically discussion of the deficit/debt today and the next 10 years. You think you know how to balance the budget? They have an interesting tool that lets you run a limited number of simulations. But, there is a nasty trick. None of the options include anything related to Medicare, Medicaid or Social Security. This is very effective at providing a sense of reality.

For example, if the 2001 and 2003 tax cuts are allowed to expire and marginal income tax rates return (increase) to what they were last time we had a balanced budget AND we freeze total discretionary spending at 2010 levels (incl. defense), then the deficit settles down at about $450 Billion per year from 2013 to 2020.

The last two sentences of their abstract are as follows:

"Beyond the 10-year projection period, growth of spending for Medicare, Medicaid, and Social Security will speed up from its already rapid rate. To keep federal deficits and debt from reaching levels that would substantially harm the economy, lawmakers would have to significantly increase revenues, decrease projected spending, or enact some combination of the two."

It is going to take a pretty good poke on Medicare in particular, but also Medicaid to ever achieve fiscal sanity. Social Security is actually alot simpler since it is tagged to inflation, whereby health care is rising much faster than overall inflation. I believe we have to do this within the context of overall health reform because I don't think you can ever get a handle of health care inflation without covering most everyone, at least in a catastrophic manner. Medicare both contributes to and partakes of health care inflation rising much faster than overall inflation because the same provider system serves Medicare, private, Medicaid and is also expected to treat uninsured persons.

Note that all the times we have had a balanced budget since World War II that revenues were about 20% of GDP. They were 15% last year due to recession, but 17-18% during from 2001 on.

I have heard a few politicians pledging not to 'cut a dime from Medicare, ever and to cut taxes.' It looks like from the simulation tool that if you just extend the 2001 and 2003 tax cuts it adds about $7 Trillion cumulatively to the deficit over the next 10 years alone. In 2015, the deficit with these tax cuts extended would be around $800 Billion rising to $1.1 Trillion in 2019 with the slope headed up.

Next time you hear a politician say their plan is to 'never cut Medicare and to decrease taxes' you should simply laugh. And then cry.

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