Federal Spending and Revenues Will Need to Grow in Coming Years, Not Shrink

• Published in: Policy File 2017
• Main Author: Van de Water, Paul N
• Format: Report
• Language: English
• Subjects: Budgets/Expenditures; Center on Budget and Policy Priorities; Government

Although some policymakers seek to prevent the federal government from growing, or to shrink it, federal spending and taxes will have to grow significantly as a share of the economy in the coming decades. This is not a statement of political values; it's a reflection of basic realities aging of America's population, health care costs that rise faster than the economy grows (especially as medical advances continue), potential national security threats, and current and emerging domestic challenges such as large infrastructure needs that cannot be deferred indefinitely. Those factors, we estimate, will boost federal spending by about 2½ percent of gross domestic product (GDP) between now and 2035 20.9 percent in 2016 to an estimated 23.5 percent in 2035. Revenues will need to rise at least as much to prevent the debt-to-GDP ratio from growing. Since 1976, federal spending has averaged 20.5 percent of GDP, although its composition has changed substantially, while federal revenue has averaged 17.4 percent of GDP. Some policymakers have said these historical averages should serve as ceilings for fiscal policy for coming decades, and some have proposed constitutional or legal limits on spending or taxes at or below these averages. But whether historical averages were ever appropriate fiscal benchmarks, they cannot be in the future due to these inescapable realities. And as spending grows, so too must revenue to finance it. To reach our 23.5 percent of GDP by 2035, we estimate (as explained in the body of this analysis) that Social Security spending will rise from today's 4.9 percent of GDP to 6.2 percent; Medicare, Medicaid, and other major health programs will rise from today's 5.5 percent to 7.2 percent; interest on the national debt will rise from 1.3 percent to 2.4 percent; and other categories of spending will shrink slightly. To finance the overall increase in spending, revenues will have to grow from 17.8 percent of GDP in 2016 to at least 20.5 percent in 2035. At that point, the nation's demographic shift will be largely complete entire baby-boom generation will have reached retirement age the pressures on the budget will abate. These projections are based on the Center on Budget and Policy Priorities' long-run budget baseline, with certain policy and other adjustments.