What a difference nine years makes

In June 2002, the non-partisan Congressional Budget Office (CBO) released a report on the federal government’s long-term budget outlook. The report predicted that federal spending, which had hovered around 20% of GDP since World War II, would reach 23.8% of GDP in 2040, 30% of GDP in the late 2050s and 40% of GDP — double the postwar average — around 2075.

“Left unattended,” the report warned, “that steady escalation in spending could cause major deficits to emerge and thereby push the government’s debt and interest expenditures to unprecedented levels.”

Those projections seem quaint now. The 2002 report predicted that it would take 39 years for federal spending to reach 24% of GDP. In fact, it took just seven. Today, federal spending as a share of GDP is 41% higher than the 2002 report predicted it would be in 2011 — a difference of $1 trillion. Meanwhile, local and state government spending has reached 17% of GDP, which means total government spending equals 41% of GDP. This is about how much Canada and most Western European governments spend in a typical year.

This June, the CBO released a new budget report that includes two projections for long-term spending — a rosy one that assumes Congress gets serious about the debt and remains serious for decades into the future (“the extended-baseline scenario”) and a more realistic one that assumes Congress doesn’t get serious about the debt (“the alternative fiscal scenario”). Neither scenario accounts for the effect that rising debt levels and interest rates will have on the economy.

For the purposes of this article, I’ll rely on the alternative fiscal scenario, since the extended-baseline model — which assumes that the provision of Obamacare that cuts Medicare payment rates by a third isn’t overturned, that the alternative minimum tax is allowed to eat away at middle-class incomes, etc. — seems implausible.

Below is a graph that compares the levels of federal spending forecast by the 2011 alternative fiscal scenario (the blue dotted line) with the levels forecast by the 2002 report (the pink dotted line). From 2002 to 2011, the blue line tracks actual spending levels.

Both forecasts predict that spending will rise over the long term, mostly due to rising interest spending, rising health care costs and the strains of an aging population on the social safety net. Still, the June 2011 projection is much grimmer. The question is, why?