Long-Term Debt Projections are a Wild Guess

The national debt appears to be stabilized over the next ten years. (http://cbo.gov/publication/44172)

The national debt appears to be stabilized over the next ten years. (http://cbo.gov/publication/44172)

This week brings good news that the national debt seems to have stabilized, at least looking ahead to the next ten years. The source for this news is updated projections by the Congressional Budget Office (CBO). The CBO is a nonpartisan agency staffed with professionals of the highest caliber, but this serves as a reminder that accurately guessing our nation’s future fiscal health is really hard. Even short-term estimates are fraught with uncertainty, and long-term projections are really just a wild guess.

Predicting the Future is Hard

Back in February, the CBO estimated that the deficit for 2013 would be $845 billion. Now, they are guessing it will be $642 billion. That’s a correction of $203 billion, or 24%. The year is not even half over, so the final number could still be significantly higher or lower than the recent estimate.

Debt projections get even hazier in the long term. Back in February, the CBO estimated that the national debt would grow by almost $7 trillion from 2014 to 2023. Their May projections have already revised that down to around $6.3 trillion. Even if no laws are changed over the next ten years, the actual debt will likely be very different from the CBO’s current projection.

To make predictions about our future fiscal situation, the CBO has to estimate highly uncertain economic variables. Even small deviations from those estimates result in big swings in the CBO forecast. For example, the future cost of Medicare and Medicaid depends on how much health care costs grow. If those costs grow just 1% faster or slower than expected, spending on Medicare and Medicaid would change by $650 billion. The recent slowdown in health care cost growth has the potential to greatly reduce future budget deficits, if the trend continues.

The CBO identifies several major sources of uncertainty in their long-term budget projections (p. 29). A 1% change in Treasury bond interest rates has a $1.1 trillion impact on the debt projection. If CBO estimates of economic growth are off by 1%, and that has a 1% impact on tax revenues, the debt projection would change by around $2.75 trillion.

Predictions of the national debt in 2060 might as well be made with a Ouija board. (http://budget.house.gov/fy2014/)

Predictions of the national debt in 2060 might as well be made with a Ouija board. (http://budget.house.gov/fy2014/)

These are far from the only sources of uncertainty in the CBO projections, but taken together, 1% changes in health care costs, interest rates, and economic growth could alter the national debt by $4.5 trillion over the next ten years. That would be a 71% change from the current estimate of $6.3 trillion in new debt.

This is not to say that long-term debt doesn’t matter, or that CBO is doing shoddy work. It’s just that predicting the future is hard.

The “Grand Bargain”

A big “grand bargain” is often characterized as the most responsible way to get the budget under control, but this approach risks depending too much on uncertain estimates of the future. If those estimates are wrong, the “grand bargain” may fail.

For example, Congress passed a cap on future Medicare cost growth called the “Sustainable Growth Rate” in a 1997 budget deal. At the time, estimated growth in health care costs suggested that this policy would modestly constrain the payments Medicare made to health care providers. However, health care costs grew faster than expected, and these payment limitations imposed far more dramatic cuts than Congress anticipated. To avoid those cuts, Congress has repeatedly passed temporary repeals of the sustainable growth rate formula, thus undoing part of the 1997 agreement.

Smaller incremental changes to tax and spending policy can actually be the more responsible way to manage the budget, both in the short-term and long-term. Short-term concerns such as high unemployment and slow economic growth are important, and have long-term implications if they are not addressed. Incremental legislation can better focus on problems that we know are happening now. This approach doesn’t ignore the deficit, but it focuses on the portion of the budget picture that is more clearly in focus.

A modest and incremental approach to budget policy acknowledges the reality that we cannot predict the future. It also recognizes that future Congresses can always change the policies of a previous Congress. Long-term debt projections can serve as a guide, but only with the understanding that they are far from perfect. Ultimately, even after the biggest “grand bargain,” there is no substitute for each Congress and Administration changing policies in a responsible manner to account for changing times.

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One thought on “Long-Term Debt Projections are a Wild Guess

  1. Pingback: Interest of One Trillion Dollars a Year on National Debt in the Cards | Prepper Podcast Radio Network

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