Federal Health Spending Will Continue Putting Pressure on Total Federal Debt

While the federal budget deficit has decreased much faster than projected in previous years, total federal debt remains at historically high levels and the costs of health care will continue to add to the debt, according to Congressional Budget Office (CBO) director Douglas Elmendorf.

The federal budget deficit totaled $750 billion for the first 11 months of fiscal year 2013, down more than $400 billion from the deficit for the similar period in FY 2012. Receipts for the first 11 months of FY 2013 totaled $2.472 trillion, $284 billion more than receipts for the same period in FY 2012. Outlays for the first 11 months of FY 2013 were $127 billion less than spending during the same period in FY 2012. The biggest decreases in spending were on defense (because of the impact of the withdrawal of troops from Afghanistan and the effect of the sequester) and unemployment benefits (because fewer people were collecting these benefits in 2013).

For all three of the government’s largest entitlement programs, however, spending increased. Social Security spending increased by $38 billion (5 percent); Medicare spending increased $10 billion (2 percent); and Medicaid spending increased by $14 billion (6 percent).

Debt Total

Even as the annual deficit is declining, however, total federal debt currently stands at about 73 percent of gross domestic product (GDP). For the 40 years prior to 2008, federal debt averaged about 38 percent of GDP.

Elmendorf noted in a presentation to the Macroeconomic Advisers Washington, D.C. policy seminar on September 12 that “the largest federal programs are becoming much more expensive because of the retirement of the baby boomers and the rising costs of health care, so we need to cut back on those programs, increase tax revenue to pay for them, or take some combination of those actions.” From 1973 to 2012, Social Security spending represented 4.2 percent of GDP. The CBO estimates that this percentage will increase to 5.3 percent by 2023. Federal health care spending averaged 2.7 percent of GDP for the 40 years prior to 2012; the CBO estimates this percentage will more than double, to 5.9 percent, by 2023.

Although Elmendorf did not present any specific policy changes relating to healthcare, he said that waiting to cut federal spending or raise taxes would lead to an even high debt total and “would increase the size of the policy adjustments needed to achieve any chosen debt target.” Implementing spending cuts or tax increases quickly, however, would weaken the economic recovery. Elmendorf came down on the side of making policy changes sooner rather than later, since changes down would hold down long-term interest rates, reduce uncertainty, and enhance confidence in the economy.