WASHINGTON (MNI) – The following is the text of the Congressional
Budget Office summary of its latest long-term budget outlook, published
Wednesday:

JUNE 2010

The Long-Term Budget Outlook

Recently, the federal government has been recording the largest
budget deficits, as a share of the economy, since the end of World War
II. As a result of those deficits, the amount of federal debt held by
the public has surged. At the end of 2008, that debt equaled 40 percent
of the nation’s annual economic output (as measured by gross domestic
product, or GDP), a little above the 40-year average of 36 percent.
Since then, large budget deficits have caused debt held by the public to
shoot upward; the Congressional Budget Office (CBO) projects that
federal debt will reach 62 percent of GDP by the end of this yearthe
highest percentage since shortly after World War II. The sharp rise in
debt stems partly from lower tax revenues and higher federal spending
related to the recent severe recession and turmoil in financial markets.

However, the growing debt also reflects an imbalance between
spending and revenues that predated those economic developments.

As the economy recovers and the policies adopted to counteract the
recession and the financial turmoil phase out, budget deficits will
probably decline markedly in the next few years. But over the long term,
the budget outlook is daunting. The retirement of the baby-boom
generation portends a significant and sustained increase in the share of
the population receiving benefits from Social Security, Medicare, and
Medicaid. Moreover, per capita spending for health care is likely to
continue rising faster than spending per person on other goods and
services for many years (although the magnitude of that gap is very
uncertain). Without significant changes in government policy, those
factors will boost federal outlays sharply relative to GDP in coming
decades under any plausible assumptions about future trends in the
economy, demographics, and health care costs.

The Outlook for Major Health Care Programs and Social Security

CBO projects that if current laws do not change, federal spending
on major mandatory health care programs will grow from roughly 5 percent
of GDP today to about 10 percent in 2035 and will continue to increase
thereafter. 1 Those projections include all of the effects of the
recently enacted health care legislation, which is expected to increase
federal spending in the next 10 years and for most of the following
decade.2 By 2030, however, that legislation will slightly reduce federal
spending for health care if all of its provisions are fully implemented,
CBO projects. That reduction in the level of spending in 2030 yields
lower projections of health care spending in the longer termeven
though, owing to the great uncertainties involved in projecting such
spending many decades in the future, enactment of the legislation did
not cause CBO to change its estimates of longer-term growth rates for
spending on the governments health care programs. Under current law,
spending on Social Security is also projected to rise over time as a
share of GDP, albeit much less dramatically. CBO projects that Social
Security spending will increase from less than 5 percent of GDP today to
about 6 percent in 2030 and then stabilize at roughly that level.

(1. Mandatory programs are ones that do not require annual
appropriations by the Congress; the major mandatory health programs
consist of Medicare, Medicaid, the Childrens Health Insurance Program,
and health insurance subsidies that will be provided through the
exchanges established by the recently enacted health care legislation.)

(2. For details, see Congressional Budget Office, letter to the
Honorable Nancy Pelosi about the budgetary effects of H.R. 4872, the
Reconciliation Act of 2010 (March 20, 2010.)

If all of its provisions are carried out, the legislation will also
increase federal revenues and reduce budget deficits over the 20102019
period and in subsequent years, according to estimates by CBO and the
staff of the Joint Committee on Taxation.)

All told, CBO projects, the aging of the population and the rising
cost of health care will cause spending on the major mandatory health
care programs and Social Security to grow from roughly 10 percent of GDP
today to about 16 percent of GDP 25 years from now if current laws are
not changed. (By comparison, spending on all of the federal governments
programs and activities, excluding interest payments on debt, has
averaged 18.5 percent of GDP over the past 40 years.) To put U.S. fiscal
policy on a sustainable path, lawmakers would have to substantially
reduce the growth in outlays for those programs relative to the amounts
that CBO is projectingor else match that growth with equivalent
declines in other federal spending, corresponding increases in federal
revenues, or some combination of the two.

Alternative Long-Term Scenarios

In this report, CBO presents the long-term budget picture under two
scenarios that embody different assumptions about future policies
governing federal revenues and spending. Budget projections grow
increasingly uncertain as they extend farther into the future, so this
report focuses largely on the next 25 years. However, because
considerable interest exists in the longer-term outlook, figures showing
projections through 2080 and associated data are available in Appendix A
of the report, and associated data are available on CBOs Web site
(www.cbo.gov).

The first long-term budget scenario used in this analysis, the
extended-baseline scenario, adheres closely to current law. It
incorporates CBOs current estimate of the impact of the recently
enacted health care legislation on revenues and mandatory spending.
(That estimate is unchanged from the one that CBO and the staff of the
Joint Committee on Taxation published in March, when the legislation was
being considered.) Under this scenario, the expiration of most of the
tax cuts enacted in 2001 and 2003, the growing reach of the alternative
minimum tax, and the way in which the tax system interacts with economic
growth would result in steadily higher average tax rates. Those rising
rates, combined with the tax provisions of the recent health care
legislation, would push total revenues to 23 percent of GDP by 2035much
higher than has typically been seen in recent decades — and to larger
percentages thereafter. At the same time, government spending on
everything other than the major mandatory health care programs, Social
Security, and interest on federal debtactivities such as national
defense and a wide variety of domestic programswould decline to the
lowest percentage of GDP since before World War II.

That significant increase in revenues and decrease in the relative
importance of other spending would offset much — though not all — of
the rise in spending on health care programs and Social Security. As a
result, debt would increase from its already high levels relative to
GDP, as would the required interest payments on that debt. Federal debt
held by the public would grow from an estimated 62 percent of GDP this
year to about 80 percent by 2035. Interest payments, which absorb
federal resources that could otherwise be used to pay for government
services, currently amount to more than 1 percent of GDP; under this
scenario, they would rise to 4 percent of GDP (or one-sixth of federal
revenues) by 2035.

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** Market News International Washington Bureau: 202-371-2121 **

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