THE LONG-TERM FISCAL OUTLOOK IS BLEAK

Restoring Fiscal Sustainability Will Require Major Changes to Programs, Revenues, and the Nation’s Health Care System - By Richard Kogan, Kris Cox, and James Horney in the Center on Budget and Policy Priorities blog This report updates the Center on Budget and Policy Priorities’ projections of federal spending, revenues, deficits, and debt through 2050. These projections — like the projections the Center issued in January 2007 and the projections by other institutions such as the Congressional Budget Office (CBO), Government Accountability Office, and Office of Management and Budget — show that without changes in current policies, federal deficits and debt in coming decades will grow to unprecedented levels that will threaten serious harm to the economy. ---------- This conclusion should not be surprising. The costs related to the recession will have only a small budgetary impact on the long-term deficit problem, because they are temporary. Temporary costs — even if very large in the short run — add much less to the long-term fiscal gap than permanent costs (such as extending the tax cuts) because their total costs are small relative to the total size of the economy over the long-run. Also, short-term economic weaknesses have little impact on the major drivers of the long-term fiscal imbalance: rising health care costs and the aging of the population. Nevertheless, policymakers should keep the long-term budget problem in mind as they take the necessary steps to stabilize financial markets and the economy. While the long-term problem should not deter policymakers from dealing with the short-term crisis, policymakers will need to demonstrate to the public and the lenders who finance our short- and longer-term borrowing needs that they are prepared to move the budget toward a sustainable long-run path when the economy improves. In addition, in designing policies to deal with the short-term problems, policymakers should consider policies that could serve “double duty” by helping to spur the economy in the short term while also laying the groundwork for measures to restore fiscal responsibility in the longer term. This includes measures such as investments in health information technology that hold promise for contributing to efforts to stem the rapid growth of health care costs over time. ------------------ Rising health care costs are the single largest cause of rapidly rising expenditures. The main sources of rising federal expenditures over the long run are rising costs throughout the U.S. health care system (both public and private) and the aging of the population. Together, these factors will drive up spending for the “big three” domestic programs: Medicare, Medicaid, and Social Security. Health care costs are by far the biggest single factor. For the past 30 years, costs per beneficiary throughout the health care system have been growing approximately 2 percentage points faster per year than per-capita GDP, and our projections assume this pattern will continue through 2050. Limiting health care cost growth to 1 percentage point faster than per-capita GDP growth would shrink the fiscal gap by more than one-third (to 2.7 percent of GDP). If health care costs could be constrained to grow only at the same rate as per-capita GDP — a daunting and probably unachievable goal — the fiscal gap would shrink by more than two-thirds, to just 1.2 percent of GDP. Fundamental health care reform must be part of any solution. Rising costs throughout the health care system exacerbate the long-term budget problem in two ways. They increase federal spending by raising the per-person cost of providing health care through Medicare and Medicaid. (Per-person costs are rising in these programs at about the same rate as in the health care system as a whole, including the public and private sectors.) In addition, rising health care costs shrink federal revenues by increasing the share of the nation’s income that is exempt from taxation. Employer-provided health benefits are excluded from taxable income, and various other provisions of the tax code allow individuals to pay some health care costs from pre-tax income. Thus, when health care costs grow faster than the economy, the share of total income that is exempt from taxation increases. A major effort is needed to expand our currently limited knowledge about ways to reduce the rate of growth in heath care costs in the public and private sectors alike, while improving the quality of care system-wide. Medicare can play an important role in these efforts, and policymakers should promote initiatives that both restrain cost growth in Medicare and serve as a model for reforms applicable to the system as a whole. Examples include eliminating the large overpayments that Medicare makes to private insurance companies that participate in the Medicare Advantage component of the program, altering Medicare’s payment systems to reward quality and efficiency, and strengthening primary care and care coordination. Full Report