CBO: High and Rising Debt Could Have 'Serious Negative Consequences'

April 14, 2014 06:52 AM

The Congressional Budget Office (CBO) estimates that if current tax and spending laws do not change, the budget deficit in fiscal year (FY) 2014 will be $492 billion, or 2.8% of gross domestic product (GDP). This is down $23 billion from CBO's February estimate "mostly because the agency now anticipates lower outlays for discretionary programs and net interest payments." This figure is down nearly 30% from FY 2013 when the budget shortfall was $680 billion. See the full April Baseline report.

However, CBO warns that if current laws don't change, the period of shrinking deficits will soon end. "Between 2015 and 2024, annual budget shortfalls are projected to rise substantially—from a low of $469 billion in 2015 to about $1 trillion from 2022 through 2024—mainly because of the aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt," CBO elaborates.

As a share of GDP, deficits are expected to dip to 2.6% in 2015 and then rise to nearly 4% by the end of the 10-year period. For comparison's sake, the deficit averaged 3.1% of GDP over the past 40 years and 2.3% in the 40 years preceding FY 2008 when the recession started. Both revenues and outlays from 2015 to 2024 are expected to exceed the revenues and outlays of the 40-year averages as a percentage of GDP.

Also concerning, CBO's baseline projects federal debt held by the public will reach 78% of GDP by 2024. This compares to 72% in 2013 and an average of 39% the past four decades. "As recently as the end of 2007, federal debt equaled just 35% of GDP," CBO explains.

CBO says such high and rising debt would have "serious negative consequences." The budget office details: "Federal spending on interest payments would increase considerably when interest rates rose to more typical levels. Moreover, because federal borrowing would eventually raise the cost of investment by businesses and other entities, the capital stock would be smaller, and productivity and wages lower, than if federal borrowing was more limited. In addition, high debt means that lawmakers would have less flexibility than they otherwise would to use tax and spending policies to respond to unexpected challenges. Finally, high debt increases the risk of a fiscal crisis in which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates."

Relative to the 2014 Farm Bill, CBO estimates the new law would reduce mandatory spending by $17 billion over the 2014-2023 period. However, the cost was estimated relative to CBO's May 2013 baseline rather than its February 2014 baseline. For more details on CBO's cost estimates for the 2014 farm bill, click here.

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