The Trouble with This Picture of the “Spending Problem”

The GAO just released its update of their long-term fiscal outlook report.  The figure above shows federal spending (the bars) and revenue (the line) under GAO’s “alternative” scenario, which is closely related to the Concord Coalition’s “plausible baseline” which assumes–more pessimistically but probably more realistically than current law–that most of the expiring tax cuts are extended and that discretionary spending grows at the same rate as the economy (GDP) rather than only with inflation.

Just by the way, note that the President’s proposed budget is much closer to this “alternative”–and to the higher associated deficits–than to current law.  (More on that point and elaborating on what I said on Friday about CBO’s analysis of the President’s budget soon.)

My immediate interest in putting up the chart above from the GAO report is that many people like to point to this picture (or very similar pictures) as evidence that the current deficit and longer-term fiscal gap is a “spending (only) problem” and not a revenue problem.  The revenue line doesn’t droop after all, even in this worse-if-not-worst case scenario where current deficit-financed tax cuts are permanently extended.  And the spending bar just keeps on growing.

But note by 2040 we will only be collecting enough revenue to cover the costs of net interest and not quite all of Social Security.  Note that we don’t have a choice about cutting out net interest as long as we’ve continued accumulating the debt that interest pays for.  Note that net interest is by far the fastest-growing component of spending and comes to dominate not just Social Security but both all of discretionary spending and Medicare and Medicaid combined.  And note that even if it is judged by many to be a “spending problem” (only or mostly), it’s nearly impossible to imagine squeezing all the spending our society will still view as essential over the next few decades under that very low (but “historically average”) revenue line–or how we will decide what doesn’t make the cut, when the wiggle room beyond net interest is so very tiny and getting smaller by the minute.

Read more at Economist Mom