CBO Projections: U.S. Debt on The Rise

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If current laws governing taxes and spending remained generally the same, the Congressional Budget Office (CBO) estimates the U.S. debt would nearly double as a percentage of GDP over the next 30 years.

Federal debt held by the public, which was equal to 39% of gross domestic product (GDP) at the end of Fiscal 2008, has already hit 75% of GDP in the wake of a financial crisis and recession. In CBO’s projections, that debt rises to 86% of GDP in 2026 and to 141% in 2046 taking out the historical peak of 106% that occurred just after World War II.

Debt has exceeded 70% of GDP during only one other period in U.S. history — from 1944 through 1950, because of the surge in federal spending during World War II.

The prospect of such large debt poses substantial risks for the nation and presents policymakers with significant challenges, CBO says.

However, CBO acknowledges that its projections are “very uncertain.” They undertook an effort to see how things would change if they adjusted four key inputs – labor force participation, productivity in the economy, interest rates on federal debt, and health care costs per person – were different from assumptions in the extended baseline.

Results of that effort: “Debt in 2046, measured as a share of GDP, could be much larger or smaller than it is in the extended baseline, ranging from nearly twice the largest amount recorded in US history to slightly less than that record high. Even at the low end of that range, debt would be higher than it is now.”

In other words, the CBO is warning that even if there are changes to the outlook, the debt situation really doesn’t get a lot better.

CBO also expects sluggish US growth ahead compared to the historical average. Real GDP (GDP with the effects of inflation excluded) would increase by 2.1% annually, on average, over the next 30 years. That compares to a 2.9% average over the past 50 years.

So what are the consequences? CBO outlines four key points:

• Reduce national saving and income in the long term;

• Increase the government’s interest costs, putting more pressure on the rest of the budget;

• Limit lawmakers’ ability to respond to unforeseen events; and

• Make a fiscal crisis more likely.

The ability to respond to any financial crisis could be key ahead, and CBO notes, “The government would need to undertake some combination of three approaches: restructure the debt (that is, seek to modify the contractual terms of existing obligations), use monetary policy to raise inflation above expectations, and adopt large and abrupt spending cuts and tax increases.”

Social security a growing factor: CBO projects that spending for Social Security would increase noticeably as a share of the economy—from 4.9% of GDP in 2016 to 6.3% in 2046.

Interest costs also to rise, CBO projects, from 1.4% of GDP in 2016 to 3.0% by 2026. By 2046, those costs would reach 5.8% of GDP under the extended baseline. CBO projects the 10-year yield would move from 2.2% at the end of 2015 to 4.1% in 2026.

Other factors, such as an economic depression, a major war, or unexpected changes in fertility, immigration, or mortality rates, could also affect the trajectory of debt, according to CBO.

Comments. This report continues to sound the wake-up call for lawmakers that we have been sounding for some time. From an economic standpoint, the forecasts are sobering. Especially when we have an economy that is barely moving ahead of historical levels. And for policy-makers, this presents another set of issues that they will have to confront at some point. The only problem is that the way of dealing with these issues has been to kick the proverbial can down the road. That, at some stage, will be no longer possible and leave lawmakers with some unpleasant choices.

Those unpleasant choices will further restrict government programs in a host of areas as lawmakers seek to rein in spending or increase taxes to generate more revenue. Those, too, are choices that will have economic impacts as well.

NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.