Congressional Budget Office

Testimony

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

Statement of 

Douglas W. Elmendorf 

Director

CBO’s 2011 Long-Term Budget Outlook

before the 

Committee on the Budget 

U.S. House of Representatives

June 23, 2011

This document is embargoed until it is delivered at 

10:00 a.m. (EDT) on Thursday, June 23, 2011. The 

contents may not be published, transmitted, or otherwise 

communicated by any print, broadcast, or electronic 

media before that time.

CBO

Chairman Ryan, Congressman Van Hollen, and Members of the Committee, thank 

you for inviting me to testify today about the Congressional Budget Office’s (CBO’s) 

2011 Long-Term Budget Outlook, which the agency released yesterday.1

Recently, the federal government has been recording budget deficits that are the 

largest as a share of the economy since 1945. Consequently, the amount of federal 

debt held by the public has surged. At the end of 2008, that debt equaled 40 percent 

of the nation’s annual economic output (a little above the 40-year average of 

37 percent). Since then, the figure has shot upward: By the end of this year, CBO 

projects, federal debt will reach roughly 70 percent of gross domestic product 

(GDP)—the highest percentage since shortly after World War II. The sharp rise in 

debt stems partly from lower tax revenues and higher federal spending related to the 

recent severe recession. However, the growing debt also reflects an imbalance between 

spending and revenues that predated the recession.

As the economy continues to recover and the policies adopted to counteract the recession phase out, budget deficits will probably decline markedly in the next few years. 

But the budget outlook, for both the coming decade and beyond, is daunting. The 

retirement of the baby-boom generation portends a significant and sustained increase 

in the share of the population receiving benefits from Social Security, Medicare, and 

Medicaid. Moreover, per capita spending for health care is likely to continue rising 

faster than spending per person on other goods and services for many years (although 

the magnitude of that gap is very uncertain). Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming 

decades under any plausible assumptions about future trends in the economy, demographics, and health care costs.

According to CBO’s projections, if current laws remained in place, spending on the 

major mandatory health care programs alone would grow from less than 6 percent of 

GDP today to about 9 percent in 2035 and would continue to increase thereafter.2 

Spending on Social Security is projected to rise much less sharply, from less than 

5 percent of GDP today to about 6 percent in 2030, and then to stabilize at roughly 

that level. Altogether, the aging of the population and the rising cost of health care 

would cause spending on the major mandatory health care programs and Social 

Security to grow from roughly 10 percent of GDP today to about 15 percent of GDP 

25 years from now. (By comparison, spending on all of the federal government’s 

programs and activities, excluding interest payments on debt, has averaged about

18.5 percent of GDP over the past 40 years.) That combined increase of roughly 

5 percentage points for such spending as a share of the economy is equivalent to about 

1. See Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June 2011).

2. Mandatory programs are programs that do not require annual appropriations by the Congress; 

the major mandatory health care programs consist of Medicare, Medicaid, the Children’s Health 

Insurance Program, and health insurance subsidies that will be provided through the exchanges 

established by the March 2010 health care legislation. 
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CBO

$750 billion today. If lawmakers ultimately modified some provisions of current law 

that might be difficult to sustain for a long period, that increase would be even larger.

Long-Term Scenarios 

In its report released yesterday, CBO presents the long-term budget outlook under 

two scenarios that embody different assumptions about future policies governing 

federal revenues and spending. Neither of those scenarios represents a prediction by 

CBO of what policies will be in effect during the next several decades, and the policies 

adopted in coming years will surely differ from those assumed for the scenarios. 

Moreover, even if the assumed policies were adopted, their economic and budgetary 

consequences would undoubtedly differ from those projected in the report because 

outcomes also depend on economic conditions, demographic trends, and other 

factors that are difficult to predict. The report focuses on the next 25 years rather 

than a longer horizon, because budget projections grow increasingly uncertain as 

they extend farther into the future.3

The Extended-Baseline Scenario 

One long-term budget scenario used in CBO’s analysis, the extended-baseline scenario,

adheres closely to current law. Under this scenario, the expiration of the tax cuts 

enacted since 2001 and most recently extended in 2010, the growing reach of the 

alternative minimum tax, the tax provisions of the recent health care legislation, and 

the way in which the tax system interacts with economic growth would result in 

steadily higher revenues relative to GDP. Revenues would reach 23 percent of GDP 

by 2035—much higher than has typically been seen in recent decades—and would 

grow to larger percentages thereafter. At the same time, under this scenario, government spending on everything other than the major mandatory health care programs, 

Social Security, and interest on federal debt—activities such as national defense and a 

wide variety of domestic programs—would decline to the lowest percentage of GDP 

since before World War II.

That significant increase in revenues and decrease in the relative magnitude of other 

spending would offset much—though not all—of the rise in spending on health care 

programs and Social Security. As a result, debt would increase slowly from its already 

high levels relative to GDP, as would the required interest payments on that debt. 

Federal debt held by the public would grow from an estimated 69 percent of GDP 

this year to 84 percent by 2035 (see Figure 1). With both debt and interest rates rising 

over time, interest payments, which absorb federal resources that could otherwise be 

used to pay for government services, would climb to 4 percent of GDP (or one-sixth 

of federal revenues) by 2035, compared with about 1 percent now. 

3. Because considerable interest exists in the longer-term outlook, figures showing projections through 

2085 are presented in Appendix B of CBO’s 2011 Long-Term Budget Outlook, and associated data 

are available on CBO’s Web site (www.cbo.gov).
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CBO

Figure 1.

Federal Debt Held by the Public Under CBO’s Long-Term 

Budget Scenarios

(Percentage of gross domestic product)

Source: Congressional Budget Office.

Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year 

baseline budget projections through 2021 and then extending the baseline concept for the 

rest of the long-term projection period. The alternative fiscal scenario incorporates several 

changes to current law that are widely expected to occur or that would modify some 

provisions that might be difficult to sustain for a long period.

The Alternative Fiscal Scenario

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would 

modify some provisions of law that might be difficult to sustain for a long period. 

Most important are the assumptions about revenues: that the tax cuts enacted since 

2001 and extended most recently in 2010 will be extended; that the reach of the 

alternative minimum tax will be restrained to stay close to its historical extent; and 

that over the longer run, tax law will evolve further so that revenues remain near their 

historical average of 18 percent of GDP. This scenario also incorporates assumptions 

that Medicare’s payment rates for physicians will remain at current levels (rather than 

declining by about a third, as under current law) and that some policies enacted in the 

March 2010 health care legislation to restrain growth in federal health care spending 

will not continue in effect after 2021. In addition, the alternative scenario includes an 

assumption that spending on activities other than the major mandatory health care 

programs, Social Security, and interest on the debt will not fall quite as low as under 

the extended-baseline scenario, although it will still fall to its lowest level (relative to 

GDP) since before World War II. 

Under those policies, federal debt would grow much more rapidly than under the 

extended-baseline scenario. With significantly lower revenues and higher outlays, 

debt held by the public would exceed 100 percent of GDP by 2021. After that, the 

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Extended-Baseline Scenario

Alternative Fiscal Scenario

Actual Projected
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growing imbalance between revenues and spending, combined with spiraling interest 

payments, would swiftly push debt to higher and higher levels. Debt as a share of 

GDP would exceed its historical peak of 109 percent by 2023 and would approach 

190 percent in 2035 (see Figure 1). 

Many budget analysts believe that the alternative fiscal scenario presents a more 

realistic picture of the nation’s underlying fiscal policies than the extended-baseline 

scenario does. The explosive path of federal debt under the alternative fiscal scenario 

underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course. 

The Impact of Growing Deficits and Debt

CBO’s projections in most of the 2011 Long-Term Budget Outlook understate the 

severity of the long-term budget problem because they do not incorporate the negative effects that additional federal debt would have on the economy, nor do they 

include the impact of higher tax rates on people’s incentives to work and save. In particular, large budget deficits and growing debt would reduce national saving, leading 

to higher interest rates, more borrowing from abroad, and less domestic investment

—which in turn would lower income growth in the United States. Taking those 

effects into account, CBO estimates that under the extended-baseline scenario, real 

(inflation-adjusted) gross national product (GNP) would be reduced slightly by 2025 

and by as much as 2 percent by 2035, compared with what it would be under the 

stable economic environment that underlies most of the projections in the report 

released yesterday.4

 Under the alternative fiscal scenario, real GNP would be 2 percent 

to 6 percent lower in 2025, and 7 percent to 18 percent lower in 2035, than under a 

stable economic environment. 

Rising levels of debt also would have other negative consequences that are not 

incorporated in those estimated effects on output:

B Higher levels of debt imply higher interest payments on that debt, which would 

eventually require either higher taxes or a reduction in government benefits and 

services. 

B Rising debt would increasingly restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or 

financial crises. As a result, the effects of such developments on the economy and 

people’s well-being could be worse.

4. GNP differs from GDP primarily by including the capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn from domestic investment. 

In the context of analyzing the impact of growing deficits and debt, GNP is a better measure 

because projected budget deficits would be partly financed by inflows of capital from other 

countries. 
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B Growing debt also would increase the probability of a sudden fiscal crisis, during 

which investors would lose confidence in the government’s ability to manage its 

budget and the government would thereby lose its ability to borrow at affordable 

rates. Such a crisis would confront policymakers with extremely difficult choices. 

To restore investors’ confidence, policymakers would probably need to enact 

spending cuts or tax increases more drastic and painful than those that would have 

been necessary had the adjustments come sooner.

To keep deficits and debt from climbing to unsustainable levels, policymakers will 

need to increase revenues substantially as a percentage of GDP, decrease spending 

significantly from projected levels, or adopt some combination of those two 

approaches. Making such changes while economic activity and employment remain 

well below their potential levels would probably slow the economic recovery. However, the sooner that medium- and long-term changes to tax and spending policies are 

agreed on, and the sooner they are carried out once the economy recovers, the smaller 

will be the damage to the economy from growing federal debt. Earlier action would 

permit smaller or more gradual changes and would give people more time to adjust to 

them, but it would require more sacrifices sooner from current older workers and 

retirees for the benefit of younger workers and future generations.