Low-Income Programs Not Driving Nation’s Long-Term Fiscal Problem
Programs Outside Health Projected To Decline Relative to Economy
Updated March 4, 2015
Low-income programs are not driving the nation’s long-term fiscal problems, contrary to the impression that a narrow look at federal spending during the Great Recession and the years that immediately followed might leave. Lawmakers should bear this in mind as they consider proposals that may emerge in coming weeks for deep cuts in this part of the budget.
Low-income program spending grew significantly between 2007 and 2010 in response to the severe economic downturn, helping to mitigate its worst effects. Since peaking in 2010 and 2011, federal spending on low-income programs other than health care has fallen considerably and will continue to fall as a percent of gross domestic product (GDP) as the economy more fully recovers. By 2018, it will — based on Congressional Budget Office estimates — drop below its average over the past 40 years, (from 1975 to 2014) and continue declining as a share of GDP after that.  (See Figure 1.)
As a result, these programs do not contribute to the nation’s long-term fiscal problems.
Specifically, federal spending for low-income programs outside health care (including refundable tax credits such as the Earned Income Tax Credit) rose from 1.9 percent of GDP in 2007 to a peak of 2.9 percent of GDP in fiscal years 2010 and 2011. This rise reflected the increase in need during the downturn as well as policies adopted in response. But such spending has dropped to an estimated 2.3 percent of GDP in 2015, and it is projected to return to the prior 40-year average of 2.1 percent by 2017 and then fall further, to 1.7 percent, by 2025.
Spending on low-income health care programs also rose sharply in response to the downturn, and then fell as a percent of GDP in 2012. But this spending then started rising again, and is expected to continue to increase as a share of GDP over the next decade. The upward trend results from factors such as rising costs throughout the U.S. health care system (which affects costs for private-sector health care as much as for public programs like Medicaid) and the aging of the population, as well as coverage expansions under the Affordable Care Act.
The projected rise in spending on low-income health programs as a percent of GDP is, however, now being offset by the projected decline in other low-income programs. Overall spending on low-income programs is expected to remain effectively flat as a percent of the economy over the next decade.
Low-Income Programs Outside Health Care Shrinking Relative to Economy
Figure 2 shows the major components of federal spending for low-income programs other than health programs in 2015, including both discretionary (annually appropriated) and mandatory (entitlement) programs.
Spending on low-income discretionary programs (programs controlled by annual appropriations) outside health care is already slightly below the 40-year average as a percent of GDP and is expected to decline significantly in the future. Going forward, this decline is driven by the 2011 Budget Control Act’s cap on annual non-defense discretionary funding, as further reduced by sequestration, which will shrink overall non-defense discretionary spending substantially over the coming decade.
Overall non-defense discretionary spending will fall from 3.3 percent of GDP in 2015 to 3.0 percent in 2017 — the lowest level on record, with data going back to 1962 — and then to 2.5 percent in 2025. (Even if the sequestration budget cuts are cancelled in full, non-defense discretionary spending will still fall to a historically low level as a percent of GDP by 2019.)
Such a large decline in overall non-defense appropriations makes it virtually inevitable that spending for low-income programs in this part of the budget will decline as well. We assume that low-income discretionary programs will fare the same (i.e., decline to the same degree) as non-defense discretionary spending as a whole. On that basis, we project that spending for low-income discretionary programs (other than health programs) will fall from 0.7 percent of GDP in 2015 to 0.5 percent by 2025. Such spending would slide downward to its lowest level as a percent of GDP since 1967.
Federal spending on low-income mandatory programs generally rose during the recession and now has come down during the recovery:
- In 2015, federal spending for low-income mandatory programs outside health care will equal 1.6 percent of GDP, somewhat above the 40-year average of 1.3 percent of GDP. The costs of these programs rose from 2007 through 2011 but have diminished significantly since then.
- Spending for low-income mandatory programs outside health care will continue to decline steadily over the next decade. It is projected to fall to 1.2 percent by 2025 — just below the historical average. (See box on SNAP spending for an illustration of these trends.)
Together, mandatory and discretionary low-income expenditures outside health care now total 2.3 percent of GDP, modestly above their 40-year average of 2.1 percent. But over the next decade, they will fall to about 1.7 percent of GDP, well below that historical average.
Low-Income Health Programs Growing Relative to Economy
Medicaid is the largest low-income health program. Those programs also include the Children’s Health Insurance Program (CHIP) and subsidies to help purchase coverage in the recently established health insurance marketplaces (or exchanges, as they are sometimes referred to). Overall, spending on low-income health programs is projected to grow from 2.2 percent of GDP in 2015 to 2.6 percent of GDP in 2025.
This projected rise in cost, relative to GDP, over the coming decade is due to several factors. To begin with, costs throughout the U.S. health care system — in both the public and private sectors — have been growing faster than GDP for several decades. In the last several years, however, health care cost growth has slowed to historically low annual rates. And, according to the latest annual National Health Expenditures projections from the Office of the Actuary at the Centers for Medicare and Medicaid Services, these costs are projected to grow at a lower annual average rate through 2023 (the latest year estimated by that analysis) than they grew between 1990 and 2008. This reflects the fact that, while a share of the recent slowdown in health care cost growth is expected to be temporary, a portion is expected to be more long-lasting.
SNAP Illustrates Recent Pattern of Low-Income Programs Outside Health
SNAP (formerly known as the Food Stamp Program) is one of the largest federal non-health programs that assist low-income people — especially during weak economic times, when by design it responds automatically to rising need as poverty and unemployment increase. SNAP has come under increased scrutiny in recent years, in part due to claims that its spending growth after the Great Recession hit is a symptom of an ongoing problem. Such claims are incorrect.
SNAP spending historically tracks economic conditions, rising when the economy weakens and then falling — with a several-year lag — when it recovers. Consistent with this pattern, SNAP spending grew through 2011 as a percent of GDP, then stabilized for two years before beginning to fall in 2014, as a new CBPP report explains.a CBO projects that SNAP spending will continue to decrease steadily over the next decade, reaching its 1995 level as a percent of the economy by 2020 (see Figure 3).
The story for SNAP thus illustrates the story for overall low-income program spending outside of health care: costs grew substantially, in part as a result of the economic downturn, a suitable response to the worst economic slump since the Great Depression. But as the economy continues to grow, costs will return to, or even edge below, prior levels as a percent of GDP. SNAP thus does not contribute to the nation’s long-term fiscal problems.
a A benefit increase in the Recovery Act, which now has ended, and higher participation among eligible households also were factors in SNAP’s growth. See Dottie Rosenbaum and Brynne Keith-Jennings, “SNAP Costs Declining, Expected to Fall Much Further,” Center on Budget and Policy Priorities, February 9, 2015, http://www.cbpp.org/cms/index.cfm?fa=view&id=4054.
Medicaid isn’t the causeof system-wide health care cost growth; in fact, per-beneficiary costs have risen more slowly in Medicaid than under private insurance over the past decade and are expected to rise no faster than private insurance costs over the next ten years. Moreover, Medicaid costs per beneficiary are substantially lower than those under private insurance (after adjusting for differences in beneficiaries’ health status), because Medicaid pays providers much lower rates and has lower administrative costs. Even so, system-wide health care cost increases, driven in part by medical advances that improve health and lengthen life but add to costs, still are expected to exceed GDP growth in coming years and decades, and Medicaid is not immune to those pressures.
Another reason that Medicaid costs will rise faster than GDP is the aging of the population. By 2025, an estimated 18.5 percent of Americans will be elderly, up from 14.7 percent in 2015. Older people have much higher average health care costs. Elderly beneficiaries account for 9 percent of Medicaid beneficiaries but 21 percent of program costs. As the population ages, the number and share of Medicaid beneficiaries who are elderly will increase, raising program costs.
Finally, the ACA’s coverage expansions — both the Medicaid expansion and the subsidies to help near-poor and many middle-income families afford coverage in the new health insurance marketplaces — will raise spending for means-tested health care programs. Although these expansions increase the growth rate of low-income health care spending while they are phasing in, that phenomenon is temporary; they are not projected to cause higher growth rates once they are fully in effect.
While spending on low-income health programs is projected to rise as a percent of GDP, spending on low-income programs outside health programs is expected to fall at a slightly faster pace. As a result, spending on low-income programs as a whole will tick down as a share of the economy by 2025 relative to its current level. After peaking at 4.9 percent of GDP in 2010, total spending on low-income programs is expected to equal 4.4 percent of GDP in 2015 and 4.3 percent of GDP in 2025. (See Table 1.) Overall spending on low-income programs as a percent of GDP is about one percentage point above the 40-year average and projected to remain above it, due to the growth in low-income health programs, which reflects the several-decade trend of rising health costs per capita, the aging of the population, and coverage expansions.
|Spending on Low-Income Programs (percent of GDP)|
|Low-income programs, excluding health||2.1||2.9||2.3||1.7|
|Low-income health programs||1.1||2.0||2.2||2.6|
|Total, all low-income programs||3.2||4.9||4.4||4.3|
|Source: CBPP calculations of Office of Management and Budget and Congressional Budget Office data|
Long-Term Fiscal Problem Is Challenging But Manageable
If the question is whether low-income programs are contributing to the nation’s longer-term budget challenges, the answer is that, outside of health care costs, the opposite is the case: those programs are shrinking modestly as a percent of GDP, falling below their 40-year average in 2018 and then edging down further. Spending on low-income health programs is continuing to rise, but total spending on low-income programs is projected to remain essentially stable into the future as a percent of the economy.
While projections of future health spending have moderated relative to past trends, the issue of rising per-person health costs remains. The growth in low-income health programs is part of the larger question of how to address cost growth in the overall U.S. health system, both public and private. Rising health care costs are not unique to low-income programs; in fact, these programs have been more effective than the private sector at containing costs.
This picture is consistent with another CBPP analysis, which finds that outside of Social Security and Medicare, total federal program spending is below its 40-year average as a percent of GDP and is projected to decline further. When Social Security and Medicare are added in, total program spending will rise slightly over the next decade, from 19.0 percent of GDP to 19.3 percent. While the large majority of the increases in those two programs reflect the aging of the population, the increases also reflect the rise in health care costs.
The nation faces a challenging but manageable long-term fiscal problem. Rising Social Security and health care costs, increased interest payments on the debt (primarily reflecting the effect of higher interest rates as the economy continues to recover), coupled with insufficient revenue levels, mean that after 2018, debt is projected to climb slowly but steadily as a percent of GDP. Debt cannot grow indefinitely as a percent of GDP without eventually causing economic harm and falling living standards. Policymakers should address this long-term trend in a balanced fashion.
Nonetheless, the assumption that means-tested safety-net programs are experiencing ever-increasing costs and contributing to the long-run budgetary challenge is mistaken.
This analysis uses CBPP budget projections over the next ten years (2016-2025), which are largely based on CBO’s January 2015 baseline projections. As in previous years, CBPP adjusts the CBO projections in a few respects. Specifically, we assume that:
- the United States will reduce troop levels in Afghanistan to 30,000 by 2017. (Due to CBO scoring rules, the CBO baseline mechanically assumes that costs for operations in Afghanistan will remain at today’s levels, adjusted for inflation, for each of the next ten years.) This adjustment uses CBO’s alternative estimate on the costs of overseas military operations;
- improvements to refundable tax credits (the Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit) enacted in the 2009 Recovery Act — which policymakers have extended twice — will continue to be extended rather than expiring at the end of 2017; and
- funding for appropriated (or “discretionary”) programs will grow with inflation and population after the BCA caps on this funding expire in 2021. CBO adjusts these programs only for inflation after 2021.
The latter two assumptions serve to increase spending on low-income programs relative to the CBO baseline. So a straightforward reliance on CBO data would have produced low-income program spending levels very slightly lower than those shown in this analysis.
In all other cases, CBPP projections are fully consistent with CBO’s ten-year projections. As a result, like CBO, CBPP assumes that:
- Congress will adhere to the BCA caps on discretionary funding, including the additional reductions required by sequestration, and that the costs of any relief in that area will be offset;
- the sustainable growth rate (SGR) provision that constrains Medicare’s payment rates to physicians will stay in place or Congress will offset the cost of SGR fixes; and
- the “tax extenders,” a set of primarily corporate tax provisions that expired at the end of 2014, will remain expired or Congress will offset the cost of continuing these provisions.
As the following table indicates, the resulting CBPP baseline produces deficit estimates very close to those of CBO’s baseline. Over the decade ahead, CBPP projects total deficits that are 3 percent below CBO’s. The deficit projections for 2025 are virtually identical.
|Effect on Projected Deficits of CBPP Adjustments (dollars in billions)|
|CBO baseline deficits||467||489||540||652||739||814||948||953||951||1,088||7,641|
Troop levels phase down
Certain tax credits continue
Appropriations grow w/ population
Debt service on adjustments
|Resulting CBPP baseline deficits||455||460||502||632||714||784||921||934||939||1,086||7,428|
|Note: Components may not add to totals due to rounding.|
 As the Technical Note at the end of the paper explains the figures in this paper are based on CBPP projections, which in most respects reflect the same assumptions as the CBO baseline, although CBPP projections assume somewhat more spending on low-income programs than CBO does.
 David Reich and Joel Friedman, “President’s Sequestration Relief Would Ease Austerity Without Raising Deficits,” Center on Budget and Policy Priorities, February 3, 2015, http://www.cbpp.org/cms/index.cfm?fa=view&id=5264.
 Andrea Sisko et al., “National Health Expenditure Projections, 2013-23: Faster Growth Expected with Expanded Coverage and Improving Economy,” Health Affairs, volume 33, no. 10, October 2014, http://content.healthaffairs.org/content/33/10/1841.
 Paul Van de Water, “Projected Health Spending Has Fallen Since 2010, Even with Health Reform’s Coverage Expansions,” Off the Charts blog, January 28, 2015, http://www.offthechartsblog.org/projected-health-spending-has-fallen-since-2010-even-with-health-reforms-coverage-expansions/.
 John Holahan et al., “Medicaid Spending Growth over the Last Decade and the Great Recession, 2000-2009,” Kaiser Commission on Medicaid and the Uninsured, February 2011 and John Holahan and Stacey McMorrow, “Medicare and Medicaid Spending Trends and the Deficit Debate,” New England Journal of Medicine, 367:393-395, August 2, 2012.
 Leighton Ku and Matthew Broaddus, “Public and Private Insurance: Stacking Up the Costs,” Health Affairs (web exclusive), June 24, 2008.
 Relative to earlier estimates, however, CBO has lowered projected spending for exchange subsidies.
 Robert Greenstein, Joel Friedman, and Isaac Shapiro, “Program Spending Outside Social Security and Medicare, Already Low in Historical Terms, Is Projected to Fall Further,” Center on Budget and Policy Priorities, updated March 4, 2015, http://www.cbpp.org/cms/?fa=view&id=3696.