[Danzig]

What Are the Costs of Delaying Action on the Budget?

The choice facing policymakers is not whether to address rising deficits and debt but when and how to do so. Debt is projected to soon grow to unsustainable levels even under the extended-baseline scenario, which assumes that spending on programs other than Medicare, Medicaid, and Social Security will decline substantially (relative to GDP) over the next 10 years and that revenues will increase as a percentage of GDP over the long term from their average historical levels. Under the alternative fiscal scenario, debt is projected to soar almost immediately.

Reducing the growth of the major entitlement programs—Social Security, Medicare, and Medicaid—would go a long way toward lowering the projected levels of debt relative to GDP. The aging of the population has the most significant impact on entitlement costs over the intermediate term, but policymakers have little control over such demographic changes. However, policy changes that altered the eligibility age for programs or modified benefits for the elderly could help offset some of the effects of aging on federal spending. In the long run, the growth of health care spending per beneficiary will drive federal entitlement spending. It would be difficult to produce a sustainable fiscal policy without reducing such spending growth.12

The longer that policy action on the budget is put off, the more costly and difficult it will be to resolve the long-term budgetary imbalance. Delays in taking action would create three major problems:



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The amount of government debt would rise, which would displace private capital—reducing the total resources available to the economy—and increase borrowing from abroad.





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The share of federal outlays devoted to paying interest on the federal debt would grow, so lawmakers would have to make ever-larger policy changes to achieve balance. As interest costs rose, policymakers would be less able to pay for other national spending priorities and would have less flexibility to deal with unexpected developments (such as a war or recession). Moreover, rising interest costs would make the economy more vulnerable to a meltdown in financial markets.





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Uncertainty about the economy would increase. The longer that action was put off, the greater the chance that policy changes would ultimately occur suddenly, possibly creating difficulties for some individuals and families, especially those in or near retirement. Announcing changes to entitlement programs or to the tax structure well in advance would give people time to adjust their plans for saving and retirement. Those adjustments could significantly reduce the impact of such policy changes on people’s standard of living.