Low-Income Programs Not Driving Nation’s Long-Term Fiscal Problem
Programs Outside Health Projected To Decline Relative to Economy
February 24, 2016
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 months or next year for deep cuts in this part of the budget.
Low-income program spending grew significantly between 2007 and 2010 in response to the severe recession, 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 grows. By 2018, it will — based on Congressional Budget Office (CBO) estimates — drop below its average over the past 40 years (1976-2015). And spending on these low-income programs will continue to decline as a percent of GDP after that. (See Figure 1.)
As a result, these programs do not contribute to the nation’s long-term fiscal problems. Nor are these programs especially generous or expensive. In total, federal spending on low-income programs outside health care averages about 2 percent of GDP, as Figure 1 shows; for every dollar the economy produces, they claim two cents.
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 2010 and 2011. This rise reflected the increase in need during the downturn as well as policies adopted in response. But as a percent of the economy, this spending has now dropped five years in a row — to an estimated 2.2 percent of GDP in 2016. It is projected to decline to the prior 40-year average of 2.1 percent in 2017 and then fall further, to 1.7 percent, in 2026, which would be the lowest level since 1990.
Spending on low-income health care programs also rose sharply in response to the recession 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 percent 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 such as Medicaid), the aging of the population, and the phasing in of coverage expansions under the Affordable Care Act (ACA).
Over the coming decade, the projected rise in spending on low-income health programs as a percent of GDP will, however, be more than offset by the projected decline in other low-income programs. Overall spending on low-income programs is expected to edge down slightly as a percent of the economy over the decade, from 4.8 percent of GDP in 2016 to 4.7 percent in 2026.
Low-Income Programs Outside Health Care Are Small and Shrinking Relative to Economy
Figure 1 shows that federal spending for low-income programs other than health care has averaged about 2 percent of the economy over the last 40 years and is projected to fall below that average in coming years. Put differently, of every dollar the economy produces, about two cents are devoted to these programs, which assist families living near or below the poverty line.
Figure 2 shows the major components of federal spending for low-income programs other than health programs in 2016, including both discretionary (annually appropriated) and mandatory (entitlement) programs.
Spending on low-income discretionary programs outside health care is already slightly below its 40-year average as a percent of GDP and is expected to decline significantly in the future. Going forward, this drop will be driven by the 2011 Budget Control Act’s (BCA) 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.
Total non-defense discretionary spending will fall from 3.3 percent of GDP in 2016 to 3.0 percent in 2018 — the lowest level on record, with data going back to 1962 — and then to 2.6 percent in 2026.
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) in the future 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 2016 to 0.5 percent by 2026. This type of low-income spending would slide downward to its lowest level as a percent of GDP since 1967.
Note that the October 2015 bipartisan budget agreement, which rolled back part of the Budget Control Act cuts for 2016 and 2017, has little effect on these trends. Spending on low-income discretionary programs outside of health care remained a constant percent of the economy from 2015 to 2016 (though it bears noting that low-income programs fared less well than other non-defense discretionary programs in the 2016 appropriations bills). But spending on low-income discretionary programs as a percent of the economy will tick down again in 2017, absent a reordering of spending priorities.
Federal spending on low-income mandatory programs generally rose during the recession but has come down during the recovery:
- In 2016, 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. These programs’ costs rose from 2007 through 2011 but have diminished significantly since then.
- Spending for low-income mandatory programs outside health care will continue to decline over the next decade. It is projected to fall to 1.2 percent of GDP by 2026 — just below its historical average. See the box on SNAP spending for an illustration of these trends.
Together, mandatory and discretionary low-income expenditures outside health care now total 2.2 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), subsidies to help pay the premiums and cost-sharing for low-income beneficiaries of Medicare’s prescription drug program, 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 2.6 percent of GDP in 2016 to 2.9 percent of GDP in 2026.
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. This remains true even though health care cost growth has slowed noticeably in recent years. The continued more moderate growth of health care costs 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 (the Supplemental Nutrition Assistance Program, 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 officially ended 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.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 and actions by policymakers to respond 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 isn’t expected to contribute to the nation’s long-term fiscal problems.
a A temporary 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 and Caseloads Declining,” Center on Budget and Policy Priorities, updated February 10, 2016, http://www.cbpp.org/research/food-assistance/snap-costs-and-caseloads-declining
Medicaid isn’t the cause of 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. Moreover, Medicaid costs per beneficiary are substantially lower than those under either Medicare or 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 2026, an estimated 18.7 percent of Americans will be elderly, up from 14.9 percent in 2016. Older people have much higher average health care costs than younger people do. Elderly beneficiaries account for 10 percent of Medicaid beneficiaries but 23 percent of program costs. As the population ages, the number and share of Medicaid beneficiaries who are elderly will increase, raising program costs. The same phenomenon will push up the costs of the low-income subsidies for Medicare’s prescription drug program.
Finally, the ACA’s major 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 slightly for means-tested health care programs. Although these expansions increased the growth rate of low-income health care spending as they were first implemented, that phenomenon is temporary and largely over.
Although spending on low-income health programs is projected to rise as a percent of GDP, spending on low-income programs outside health is expected to fall at a slightly faster pace. As a result, spending on low-income programs as a whole will decline as a percent of the economy by 2026 relative to its current level. After peaking at 5.0 percent of GDP in 2010, total spending on low-income programs is expected to equal 4.8 percent of GDP in 2016 and 4.7 percent of GDP in 2026. (See Table 1.) As a percent of GDP, spending on low-income programs now exceeds the 40-year average and is projected to remain about one percentage point above it, due to the growth in low-income health programs.
|Spending on Low-Income Programs (percent of GDP)|
|Low-income programs, excluding health||2.1||2.9||2.2||1.7|
|Low-income health programs||1.2||2.2||2.6||2.9|
|Total, all low-income programs||3.3||5.0||4.8||4.7|
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. Indeed, even though spending on low-income health programs is continuing to rise, total spending on low-income programs is projected to decline slightly over the next decade as a percent of the economy.
While projections of future health spending have moderated substantially relative to past trends, the issue of rising per-person health costs remains (and is compounded by the aging of the population). The growth in the cost of 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 by the end of the decade, from 19.8 percent of GDP in 2016 to 20.1 percent in 2026. Spending on Social Security and Medicare will rise by 1.6 percent of GDP during this period. The large majority of this increase reflects the aging of the population, but it also reflects the continuing rise in health care costs.
The nation faces a challenging but manageable long-term fiscal problem. Rising Social Security and health care costs and 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 as a percent of GDP through 2040. Debt cannot grow indefinitely as a percent of GDP without eventually causing economic harm. Policymakers should address this long-term trend in a balanced fashion.
Nonetheless, the assumption that means-tested safety-net programs (outside health) 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 (2017-2026), which are largely based on CBO’s January 2016 baseline projections. As in previous years, CBPP adjusts the CBO projections in a few respects. Specifically, we assume that:
- Spending on Overseas Contingency Operations (OCO) will decline starting in 2018, reflecting lower levels of direct U.S. involvement in overseas conflicts such as Iraq and Afghanistan. This adjustment uses a path from CBO’s August 2015 budget report that assumes a phasedown in OCO funding and applies that path starting with 2018. (The Bipartisan Budget Act of 2015, which freezes total funding for overseas military operations in 2016 and 2017 at the 2015 level, will have expired by then.) By contrast, the CBO baseline mechanically assumes that OCO funding will remain at today’s levels, adjusted for inflation, for each of the next ten years.
- Emergency and disaster spending will reflect its average level for the last five years (2012-2016). The CBO baseline generally uses the current-year funding level as the basis of its projections for this spending, regardless of whether that funding level is high or low by historical standards. (Funding for 2016 is well below average.)
- Funding for appropriated (or “discretionary”) programs will grow with inflation and population after the Budget Control Act caps on appropriated funding expire in 2021. This approach better recognizes changes in need than the CBO approach, which adjusts these programs only for inflation after 2021.
The first two assumptions have no effect on low-income spending projections. The last assumption serves to increase spending on low-income programs relative to the CBO baseline. The CBPP approach thus produces slightly higher spending projections for low-income programs than CBO’s baseline does.
As Table 2 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 2 percent below CBO’s. The deficit projections for 2026 are virtually identical.
|Effect on Projected Deficits of CBPP Adjustments (dollars in billions)|
|Deficits under CBO baseline||561||572||738||810||893||1,044||1,077||1,089||1,226||1,366||9,378|
|Phase down overseas operations||-1||-13||-29||-41||-48||-52||-54||-56||-57||-58||-409|
|Use historical emergency and disaster spending||2||6||8||9||10||11||12||12||12||13||95|
|Grow appropriations w/population||6||15||25||36||48||131|
|Debt service on adjustments||0||0||-1||-2||-3||-4||-5||-6||-7||-8||-36|
|Resulting deficits under CBPP baseline||563||566||716||776||852||1,005||1,045||1,064||1,211||1,361||9,159|
|MEMORANDUM (under CBPP baseline, as a percentage of GDP)|
|Debt held by the public||75.7%||75.7%||76.6%||77.5%||78.4%||79.7%||80.9%||82.1%||83.5%||85.3%|
 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 Douglas Rice, “2016 Appropriations Placed Low Priority on Low-Income Programs; Better Priorities Needed for 2017,” Center on Budget and Policy Priorities, January 26, 2016, http://www.cbpp.org/research/federal-budget/2016-appropriations-placed-low-priority-on-low-income-programs-better.
 Paul Van de Water, “National Health Spending Growth Remains on Slow Track,” Center on Budget and Policy Priorities, December 2, 2015, http://www.cbpp.org/blog/national-health-spending-growth-remains-on-slow-track.
 Paul Van de Water, “Projected Health Spending Has Fallen Since 2010, Even with Health Reform’s Coverage Expansions,” Center on Budget and Policy Priorities, 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.
 The Medicaid and CHIP Payment and Access Commission (MACPAC), “MACStats: Medicaid and CHIP Data Book,” December 2015, https://www.macpac.gov/publication/macstats-medicaid-and-chip-data-book-2/.
 Relative to earlier estimates, however, CBO has lowered projected spending for exchange subsidies.
 Robert Greenstein, Joel Friedman, and Isaac Shapiro, “Program Spending Historically Low Outside Social Security and Medicare, Projected to Fall Further,” Center on Budget and Policy Priorities, updated February 24, 2016, http://www.cbpp.org/cms/?fa=view&id=3696.