by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Despite the 2.6% rate of growth in the fourth quarter, strength in the second and third quarters meant that average annual growth over 2014’s last three quarters ran at a pretty respectable 4.1%. Expect some slowdown in 2015, with growth at 3.5%, or a bit higher.
THE OUTLOOK FOR THE VERY LONG TERM doesn’t seem nearly so favorable, based on the release last week of 10-year budget projections by the nonpartisan Congressional Budget Office. Once again the CBO warned that the future is “worrisome.” In fact, looking beyond 2025, the agency repeated the scary point that “high and rising debt, relative to the size of the economy” could bring “the risk of a fiscal crisis.”
Federal debt held by the public currently stands at 74.1% of nominal gross domestic product, “more than twice what it was at the end of 2007,” the CBO notes, “and higher than in any year since 1950.” The agency’s “baseline” projections, which assume no change to current law, project a slight decline in that percentage over the next few years, to a 2018 low of 73.3%. But from there, it would start rising again, to 78.7% by 2025.
As mentioned, however, that assumes no change to current law. The baseline projects that federal “discretionary spending” will decline as a share of GDP under the 2011 Budget Control Act, from 6.8% in 2014 to 5.1% by 2025. But budget controls can always be de-controlled if the government so decides. Cato Institute economist Chris Edwards fears that a deal may emerge whereby Republicans get a boost in defense spending in exchange for the Democrats getting one in nondefense discretionary spending.
If that were to happen, the debt-to-GDP ratio could be noticeably higher. I calculated the fiscal effects even assuming the projected decline in discretionary spending’s share of GDP from 2014 to 2015 persisted. What would happen if the share remained at 6.5% over the next 10 years? The debt by 2025 would be 88% of GDP, rather than 78.7%.
And “beyond the coming decade,” the agency observes, “the fiscal outlook is significantly more worrisome,” given “the aging of the population, the growth in per capita spending on health care, and the ongoing expansion of federal subsidies for health insurance.”