Money vs. Savings

For several years now, the so called “deficit hawks” have been demanding that the federal government get $4 trillion in deficit reduction over the next decade, because somehow that is the magical number to stop some vague disaster, which also seems to be exactly a few years on the horizon. The push for a mythic $4 trillion package has been used to advocate for some idiotic policies and the adoption of a host of recent austerity measures. It is possible though, that this goal has already been reached. Yet almost no one in the media seems to acknowledge it.

To begin with, previous piecemeal deals reached by Congress, though they failed to live up to the title of a grand bargain, still resulted in significant reductions. Previously, cuts in appropriations and the new tax deal resulted in roughly 2.4 trillion in deficit reduction, according to the CBPP. That leaves only another $1.6 trillion to go. Most of that will be taken care of if the $1.2 trillion sequestration cuts are allowed to go into effect.

Even without the sequestration cuts, our deficit over the next ten years may have already dropped by hundreds of billions on its own. One of the big unknowns in trying to project government spending over the next decade is how much health care will cost in the future. Health care is one of the biggest expenditures for the government, and traditional health care spending has increased much faster than the rest of the economy.

Medicare Spending Has Slowed Dramatically in the Past Three Years

In the past three years though, government health care spending has grown at a historically low rate. Last year per Medicare beneficiary increased by only 0.4% well below the 3.4% increase in per capita GDP. A single year could be dismissed as a fluke, but three straight years of slow growth is a trend. It is possible this will be a short lived trend caused by the recession, but it is also possible it is the product of many factors that could persist well into the future.

If this is the case, then the CBO deficit projections would be dramatically off. The CBO projections are based on the assumption that Medicare spending per beneficiary will grow at GDP minus 0.3% but from 2010-2012 per beneficiary spending grow on average 1.9% a year which is a full 1.3% points below the average increase in GDP over that time.

Even a tiny decrease in the growth rate would add up to massive reductions. According to the CBO budget outlook last year, “For example, spending per enrollee for Medicare and Medicaid—which has generally grown faster than GDP—is difficult to predict, and that spending will have a large effect on the programs’ costs in coming years. If per capita costs grew 1 percentage point faster or slower per year than CBO has projected for the next decade, total outlays for Medicare (excluding receipts from premiums) and Medicaid would be about $800 billion higher or lower for that period.

It is possible that if this recent trend in public health care spending holds, the federal government’s ten year deficit has already improved dramatically without Congress needing to take any new actions. It will be interesting to see how much the CBO updates their projections based on this third straight year of slow Medicare growth when they release their 2013 budget outlook next week.

Photo by 401 (K) 2013 under Creative Commons License