In its latest warning the country is headed for a long-term debt crisis without a major spending course correction, the Congressional Budget Office reported on Tuesday that the debt would surge to over 100 percent of the total Gross Domestic Product by 2040 or a lot higher if current optimistic economic assumptions prove wrong.
The gloomy message from CBO’s new director, Keith Hall, varied little from repeated warnings from his predecessor Doug Elmendorf that the administration and lawmakers must avoid complacency during the current surge in the economy and declining annual budget deficits.
Elmendorf testified before the House Budget Committee last January that debt will exceed 100 percent of the total economy within 25 years and continue to rise, a “trend that could not be sustained” and would eventually heighten “the risk of a fiscal crisis.”
Hall, who was handpicked by congressional Republican leaders to head the non-partisan budget agency earlier this year, stated today, “The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery.”
Largely because of the aging baby boomers and rising health care costs, the extended baseline projections indicate that revenues will fall far short of spending over the long term, producing a substantial imbalance in the federal budget. Consequently, budget deficits are projected to rise steadily. By 2040, federal debt held by the public will rise to a percentage of GDP last seen during the final year of World War II.
Interest payments on that debt represent a large and rapidly growing federal expense. The government’s net outlays for interest would rise to 4.3 percent of GDP by 2040 CBO projects. That percentage would be higher than the two-percent average of the past 50 years.
”At some point, investors would begin to doubt the government’s willingness or ability to meet its debt obligations, requiring it to pay much higher interest costs in order to continue borrowing money,” according to CBO. “Such a fiscal crisis would present policymakers with extremely difficult choices and would probably have a substantial negative impact on the country.”
The Obama administration and many Democrats and liberal analysts have hailed the government’s success in narrowing the annual gap between spending and revenues after a prolonged period of huge annual deficits that once exceeded $1 trillion. But that good news will only last a few more years before yearly losses and the cumulative national debt begin to increase dramatically, both in absolute dollars and as a percentage of the gross domestic product.
“CBO's projections show a fiscal future where debt rises to nearly unprecedented levels, and spending going just to interest on the debt takes up a large and growing share of the budget,” said the Committee for a Responsible Federal Budget, a budget watchdog group. “Lawmakers will need to make significant reforms to the budget to ensure debt is sustainable and the federal government has the fiscal space to be able to budget effectively.”
Rep. Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee, said, “The question has never been if we should reduce the long-term deficit – the question is how. While we have made important progress in recent years, CBO’s report shows we have more to do to be sustainable over the longer term. Democrats are committed to a balanced approach to reducing the deficit.”
He added, “The fastest and most effective way to reduce our deficit is to put Americans back to work and increase the take-home pay of families working hard to make ends meet.”
CBO projects that debt will remain relatively stable at about 74 percent of GDP through 2020, but then rise steadily, reaching 78 percent of GDP by 2025 and 103 percent by 2040. Beyond 2040, debt would continue to grow continuously to 181 percent of GDP by 2090. Under CBO's “Alternative Fiscal Scenario,” debt would reach about 175 percent of GDP by 2040.
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