CBO: Health Care Spending Will Increase Deficit

Published October 8, 2009

While a world leader in productivity, wealth, technology, and personal freedom, the United States is also fast becoming a leader in national debt, which may weigh heavily on the ultimate economic effect of national health care reform.

With a total debt equal to 60.8 percent of its gross domestic product, the United States currently ranks 24th of 126 countries in the CIA World Factbook—outpacing China, Great Britain, Sweden, and the entire continent of South America.

According to the Congressional Budget Office, this ranking is only going to rise in the foreseeable future, as a June 2009 CBO report forecasts the debt will reach 79 percent of GDP by 2035.

Rising Health, Retirement Spending

The primary cause for America’s climbing debt is the new wave of costs for Medicaid, Medicare, and Social Security, which are expected to be strained by the swelling ranks of baby boomer retirees and a steady increase in health care expenses as the population ages. Medicare and Medicaid will rise from about 5 percent of GDP in 2009 to about 10 percent in 2035, while Social Security rises to about 6 percent in 2035.

These trends spell serious trouble for taxpayers. As debt accumulates, lenders overseas will charge higher interest rates to cover the risks. According to Brian Riedl, a budget analyst for The Heritage Foundation in Washington, DC, the federal government pays $170 billion a year in interest on its debt now, which will balloon to $806 billion a year by 2019.

“We will see a gradual decrease in our cost of living as a result of decreased consumer spending—funds being used to pay off rising interest rates,” said Riedl.

Drastic Measures Considered

Riedl believes the U.S. government will face dramatic choices: Print more money, raise taxes, drastically cut spending, or go into default. The decisions made at the national level on health care policy could accelerate this process.

In the World Economic Forum’s (WEF) 2009-2010 Global Competitiveness Report, the United States—which the annual report has consistently ranked first in the world for competitiveness—was surpassed this year by Switzerland. According to the WEF, the reason for the change is America’s lack of “macroeconomic stability. … Repeated fiscal deficits have led to burgeoning levels of public indebtedness, which are presently being exacerbated by significant stimulus spending.”

The Obama administration cites the deficit-raising rise in health care costs as all the more reason why Congress should enact the president’s proposed health care overhaul.

“The debate about health insurance reform boils down to a choice between two approaches,” Obama said in an August 8, 2009 address. “The first is almost guaranteed to double health costs over the next decade … and bankrupt state and federal governments. That’s the status quo. We can either continue this approach, or we can choose another one.”

But while the status quo is costly, reports indicate Obama’s alternative plan will be even costlier. Congress’s Joint Committee on Taxation calculated the House and Senate versions of the Democratic bill would add, respectively, $239 billion and $597 billion to the deficit over the next 10 years.

Care Rationing Expected

Those expenditures might be worth it if they produce savings at the ground level, but the CBO has scored every version of the health care legislation as increasing costs.

“Doing nothing is not an option: Legislation must ultimately be adopted that raises revenue or reduces spending or both,” the CBO report authors wrote.

Given that adding 40 million people to the health care system will inevitably expend resources and raise prices, Riedl believes prices might get so high Washington will have to step in to alter supply or demand.

“Washington’s solution will have to be price controls and rationing. Those will be the only ways to keep costs down with the massive increases in demand the health care system can’t afford on its own,” Riedl said.

Riedl’s suggestion: “Let’s avoid a situation where we’ll face a choice between massive spending cuts, massive tax hikes, and massive debt.”

Rick Docksai ([email protected]) writes from Washington, DC.

For more information …

The Global Competitiveness Report, 2009-2010, by Klaus Schwab, World Economic Forum: http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm