MORNING AFTER IN AMERICA / THE WALL STREET JOURNAL REVIEW & OUTLOOK

Review & Outlook

Morning After in America

Medicaid spending will climb by 15% this year, thanks to ObamaCare.

Aug. 29, 2014 6:08 p.m. ET

President Obama and the 113th Congress finally resolved the showdown of the immovable object meeting the irresistible force—in the end, nothing much happened. But the political standstill doesn't mean that the U.S. budget troubles have solved themselves.

On Wednesday the Congressional Budget Office updated its fiscal and economic outlook for the next decade, and to adapt Ronald Reagan for a new era, the report could be called the Morning After in America. The excesses of Mr. Obama's first term continue to spread through the fisc despite the modest restraint of the Republican House, creating new dangers in the years ahead.

The CBO revised downward its economic growth projections for 2014 to 1.5% from 3.1%, which was hardly a bombshell given that real gross domestic product has increased by only 1.05% so far this year. The budget shop's Keynesnians are perkier about the future, predicting 3.4% for 2015 and 2016. But the boom that typically follows a deep recession has always been just around the corner, every year since 2009. 

Maybe the sixth time's the charm.

Corbis

Tax receipts will rise smartly this year, climbing 8% over 2013 to $3.01 trillion, led by a 15% increase in corporate income tax revenue and 6% among individuals. One promise Mr. Obama can say he's kept is soaking the affluent: Revenue from individuals will rise to 9.4% of GDP by 2024 absent reform, higher than any year of the preceding half-century except for two.

This revenue burst means total taxes will consume 17.5% of the economy this year, up from 16.7% last year, and rising to 18.3% in 2015. The CBO expects they'll stay in that 18% to 18.3% range over the decade, well above the 40-year average of 17.4% of GDP. The reality is that America is not undertaxed.

Maybe the larger news is how little difference this revenue windfall makes in CBO's deficit forecast. The short-term deficit relative to the size of the economy is falling only slightly, because spending is increasing much faster.

Entitlements will cruise on autopilot by 4% this year, despite an historically low increase of 2% in Medicare that could be temporary. The major budget driver now is Medicaid, which will surge by 15% on ObamaCare's expansion of that program. The figure would be still higher had not 23 states opted out to protect the integrity of their own budgets.

Some 85 cents of every increased dollar of spending over the next 10 years will flow to entitlements, mainly health care. Medicare, Medicaid and ObamaCare will rise to 5.9% of GDP from 4.9% today. All other spending except for these programs, Social Security and interest on the debt will grow by 20% but fall to the lowest share of GDP since 1940. So everything else the government is supposed to do—defend the country, fund basic research, build roads and bridges, and even the basic social safety net like unemployment insurance—is being crowded out by these income transfers.

In a word, the debt problem hasn't gone away. The Obama spending binge and slow growth have brought debt held by the public to 74.4% of the economy this year, up from 72% last year and 35% as recently as 2007. The debt-to-GDP ratio will rise to 77.2% a decade out, CBO predicts, but that assumes that the U.S. doesn't experience another recession or become the casualty of a crash overseas. The U.S. has very little cushion for errors or economic surprises—which are becoming the hallmark of the Obama Presidency.