Health Care and the Long-Run Budget Deficit

The CBPP did an interesting analysis of the long-term budget deficit issue yesterday that reformulated the familiar point about health care costs and deficits by observing that there’s a revenue-side impact here too:

Long-term spending projections. After 2019, we extrapolate components of the federal budget based on the growth rates estimated in CBO’s June 2009 report. We adopt CBO’s rate of growth for Social Security spending in our projections. Our projections of Medicare and Medicaid spending assume that each program will grow at the rate CBO assumes for the two programs combined.

We assume that all other spending will grow at the rate of inflation and population growth combined, meaning that it will gradually shrink as a percentage of GDP.

Long-term revenue projections. Our revenue projections largely follow CBO’s alternative fiscal scenario, which assumes extension both of the 2001 and 2003 individual income tax cuts and of AMT relief. In addition, our numbers — like CBO’s — assume a decrease in revenues due to increased private health care spending: as health care costs rise, workers are likely to receive more of their compensation in the form of tax-exempt health care benefits and less in the form of taxable wages, so total revenues decline. But because we project that excess cost growth in other health-care spending will mimic that in Medicare and Medicaid, whereas CBO estimates it will be somewhat lower than in those programs, our revenue estimates are lower than CBO’s.

Thinking about the long-run deficit you can really abstract away from all the present political controversies and just focus on two facts. One is that the US has an existing commitment to provide generous comprehensive health care to all senior citizens. The other is that health care costs are rising faster than GDP. That means that unless we’re prepared to violate that commitment (which it seems to me we aren’t) we need to prepare ourselves for taxes to steadily increase as a percent of GDP (which it seems to me we also aren’t). The broad “center” of the political spectrum, ranging from the leaders of both parties, is stuck in the middle of this pincers movement. You have left-wing and right-wing versions of ideas about how to slow the growth in health care spending, but I’ve never seen a credible argument that any of these things can actually slow health care growth to less than the rate of GDP growth.

Note that some sectors or other have to grow faster than GDP. The mere fact that something is doesn’t show that anything has “gone wrong.” We just happen to have substantially assigned one such category to the public sector; and we’ve so assigned to to an even greater degree than most people realize via implicit tax subsidies.