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Recently, the Congressional Budget Office released their Long-Term Budget Outlook for 2015. The official CBO Outlook included some pretty scary figures. The forecast projects the deficit as a percentage of GDP to increase from below 3 percent, to nearly 6 percent in the next twenty-five years. Over the same time frame, the CBO forecasts national debt to increase to over 100 percent of GDP.
The report further showed that to get our debt in line with historical averages, we would need to increase revenues by 14 percent or reduce spending by 13 percent. The Outlook warns that the longer these issues are not addressed, the harsher and more extreme the measures to curb the debt will have to be.
While these figures are concerning, the real picture is even more concerning. You could say that the CBO report is the PG, made for TV, version of the real story.
For one, the CBO does not include intergovernmental holdings in its figures when calculating the national debt. These holdings are money that is borrowed from one government agency and spent by another.
While this debt is just as real as any other money owed by the government, it is not included by the CBO as debt held by the public. The intergovernmental holdings are no small fries either. While publicly held debt is the larger portion of our debt, currently just over $13 trillion, intergovernmental holdings account for over $5 trillion.
More importantly, the CBO does not account for all unfunded liabilities over an infinite time horizon. A working paper from Mercatus Center, Closing America’s Enormous Fiscal Gap: Who Will Pay?, by Laurence Kotlikoff and Adam Michel, shows what the true fiscal gap is, and what it would take to close the gap.
While the CBO places our debt at $13 trillion, the true fiscal gap amounts to $210 trillion, sixteen times greater than the CBO report, and twelve times greater than the United States economy, not the 74 percent of GDP that the CBO reports.
The official deficits have been in the $400-500 billion range the last few years, but the fiscal gap jumped $5 trillion from 2013 to 2014. Adding $5 trillion to our fiscal gap each year is not sustainable. Inaction, or delayed action, is not an option because any delay simply widens the fiscal gap.
Another problem with the CBO Budget Outlook is that much of its work projecting revenue and spending is guesswork. For instance, the CBO’s GDP growth forecasts from 1999 to 2013 were off by an average of 1.7 percent. In 2007 the CBO estimated the 2013 SNAP program to cost $40 billion; the actual cost of the program in 2013 was $83 billion. Similarly, the 2012 and 2013 estimates of the 2015 budgetary impact of ObamaCare differed by 35 percent.
The CBO has published a warning that should get everybody’s attention, but the numbers they use downplay the problems we face. From not counting intergovernmental holdings, to not accounting for all unfunded liabilities over an infinite time horizon, to using inaccurate projections, there are many ways the true amount of our debt is understated. Every day of inaction only increases our debt and makes the solution that much more difficult.