No Runny Eggs

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GAO – Unfunded liabilities over the next 75 years – $41.1-$76.4 trillion

by @ 15:03 on March 5, 2010. Filed under Politics - National.

Rep. Paul Ryan (R-WI) and the Republicans on the House Budget Committee point to a pair of publications from the Treasury Department and the Government Accountability Office that both show that the amount of unfunded liabilities going completely off the charts. I’ll focus on the GAO report, mostly because it is less than a tenth the size of the Treasury Department one, but also because the GAO can’t render an opinion on the bulk of the Treasury Department one because of “widespread material internal control weaknesses”.

Before I really delve into the GAO’s January 2010 update on “The Federal Government’s Long-Term Fiscal Outlook”, I have to briefly explain the two major scenarios they use; the “Baseline Extended” and the “Alternate”. Both are based on the Congressional Budget Office’s January 2010 10-year baseline. The major difference on the revenue side is the Baseline Adjusted assumes that the expiring tax cuts (both Bush’s and Obama’s) expire on schedule and the Alternate Minimum Tax does not get indexed for inflation (the indexing currently must be done by Congress yearly), then continue to be at 20.2% of GDP (the 2020 level) after 2020, while the Alternate assumes that the tax cuts continue through 2020 and the AMT continues to be indexed through 2020, then adjust to the 40-year historical average of 18.1% of GDP. On the spending side, unlike the Baseline Extended, the Medicare “Doc Fix” (again, done by Congress yearly) continues to be done, the refundable portion of tax credits due to expire don’t through 2020, and discretionary spending goes up at the rate of economic growth (or a constant 8.7% of GDP, versus the Baseline Extended assumption of going up by the rate of inflation through 2020 then remaining at 6.7% of GDP).

Under the Baseline Extended scenario, which the GAO notes has revenues higher than historical average and discretionary spending below historical average, the unfunded liability over the next 75 years is $41.1 trillion. That compares very unfavorably to the fall 2009 estimate of $36.1 trillion in unfunded liability. Of note, the GAO says that either taxes would immediately need to go up 24.2% and remain that much higher than their projections throughout the next 75 years, which would leave taxes at 25.3% of GDP by 2020, or discretionary spending be immediately reduced by 20.0% and remain down at that level throughout the next 75 years, to close that gap.

However, we know that government will not allow spending to grow by only the rate of inflation; hence the Alternate scenario is operative. The GAO notes that both revenues and discretionary spending under that scenario are roughly the same as their historical averages. Under that scenario, the unfunded liability over the next 75 years is $76.4 trillion. That’s right – a $1 trillion deficit every year for the next 75 years. That is also a $14.3 trillion increase in unfunded liabilities since last fall, when it was $62.1 trillion.

Some items of note from Ryan and the House Republicans on the Budget Committee:

  • By 2020, roughly 93 cents of every dollar of Federal revenue will be spent on major
    entitlement programs and net interest costs.
  • By 2030, net interest payments on the Federal Government’s accumulating debt will
    exceed 8 percent of gross domestic product [GDP] – making them the largest single
    expenditure in the Federal budget.
  • To close the fiscal gap today, the government would have to immediately raise taxes by
    50.5 percent (note, that would raise the tax take beyond 2020 to 27.2% of GDP), or cut non-interest spending by 34.2 percent.
  • If no action is taken in the next 10 years, in 2020 the government would have to raise
    taxes by 60.7 percent (or to 29.1% of GDP), or cut noninterest spending by 40.2 percent

Figures 3 and 4 in the GAO report, which outline revenues and composition of spending under the Baseline Extended and Alternate scenarios respectively, are must-sees. Even under the Baseline Extended model, spending on interest, Social Security, Medicare and Medicaid will exceed total revenues by 2040. It’s worse under the Alternate scenario – the major entitlements and interest will exceed total revenues long before 2030, and Social Security alone plus interest will exceed total revenues in 2040.

For those of you who think that the problem is low revenues, I decided to mash the Baseline Extended revenue projection into the Alternate spending chart, which is the most-likely scenario given that the majority of “Republican” Senators refused to find $10 billion in a $3,600 billion budget to cut to pay for a month’s worth of additional unemployment benefits.

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