CBO Warns of Looming Fiscal Crisis as Debt Soars
Business + Economy

CBO Warns of Looming Fiscal Crisis as Debt Soars

iStockphoto/The Fiscal Times

A new analysis by the non partisan Congressional Budget Office suggests that the U.S. could face another devastating fiscal crisis. The CBO report says that federal debt held by the public will reach nearly 70 percent of the overall U.S. economy by the end of the year -- the highest percentage since shortly after World War II.

If current policies are continued, federal debt would grow rapidly from its already high level, exceeding 90 percent of Gross Domestic Product in 2022, according to the report issued on Tuesday.  After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.

RELATED:  National Debt: America’s Declaration of Dependence

The long-term CBO outlook warns that, absent some grand bargain by the White House and Congress to begin controlling spiraling entitlement and other government spending, the “Growing debt . . .  would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”

“Such a crisis would confront policymakers with extremely difficult choices,” the report added. “To restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.”

The report comes amid news about a slowing economic recovery and a potential year-end budget crisis as the federal government appears headed for what Fed Chairman Ben Bernanke called “a fiscal cliff.” The government faces nearly $8 trillion in higher taxes and automatic spending cuts when all of the Bush-era tax cuts expire at the same time that $1.2 trillion of automatic spending cuts on military and domestic programs are scheduled to take effect in early January.

In accordance with last summer’s tortuous budget deal, Congress raised the debt limit to $15.2 trillion; in January 2012, the limit rose to $16.4 trillion after Senate Democrats voted down a “resolution of disapproval” that had been passed by House Republicans. The Treasury is likely to bump up against the current limits on borrowing early next year, but House Speaker John Boehner, R-Ohio, has vowed to table another increase in the federal debt ceiling unless it is offset by larger spending cuts.

The CBO also recently warned that the confluence of expiring tax cuts and automatic spending reductions could lead to another recession. Many Democrats and liberal advocacy groups fear that abrupt changes in government policies – particularly deep cuts in domestic programs – would seriously undermine the economic recovery.

Republicans have called for an extension of all the Bush-era tax cuts and a cancellation of the military cuts, and  they argue that that a weaker economy -- as reflected by a slight increase in the unemployment rate to 8.2 percent on Friday -- would make it all the more urgent to avoid tax increases this year. President Obama and Congressional Democrats favor allowing tax cuts for the rich to expire and have stood firm on the automatic cuts.

House Budget Committee Chairman Paul Ryan, R-Wis., said today that coming on the heels of last Friday’s dismal Labor Department report showing that employers created only 69,000 new jobs last month, the new CBO report underscores that “the President’s policies are not working.”

“Americans deserve better than the European-style austerity offered by the President’s broken promises and bankrupt policies,” he said. “Repeating Europe’s mistakes, the President’s policies call for job-crushing tax increases and harsh disruptions for beneficiaries of government programs as the debt spirals out of control.” Ryan added that the CBO report affirms that the massive health-care overhaul fails to address the explosion in health care costs. Mandatory federal spending on Medicare, Medicaid and other health care will increase by 93 percent from 5.4 percent of GDP today to 10.4 percent of GDP over the next 25 years.


Democratic and Republican lawmakers are all but certain to wait to see the outcome of the November election before deciding what to do about the fiscal challenges in hopes that voters will give their party the upper hand heading into negotiations over spending, tax reform and long term entitlement reform.

The nation’s lawmakers will face difficult tradeoffs in deciding how to phase in any deficit reduction, CBO said.

“Abruptly implementing spending cuts or tax increases would give families, businesses and state and local governments little time to plan and adjust,” according to the CBO. “Immediate spending cuts or tax increases would represent an added drag on the weak economic expansion.”  Yet “cutting spending or increasing taxes slowly would lead to a greater accumulation of government debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect,” CBO said.

The CBO said that the aging baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and long-term care services financed by Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services.  Providing the health care services and retirement and disability benefits that people are accustomed to will consume a greater share of the economy in the future than it did in the past.

Specifically, if current laws remained in place, spending on the major federal health care programs alone would grow from more than five percent of GDP today to almost 10 percent in 2037 and would continue to increase thereafter. Spending on Social Security is projected to rise but much less sharply.

Taken together, the aging of the population and the rising cost of health care would cause spending on the major health care programs and Social Security to grow from more than 10 percent of GDP today to almost 16 percent of GDP 25 years from now, the report stated.  That combined increase is equivalent to about $850 billion today. By comparison, spending on all of the federal government’s programs and activities, excluding net outlays for interest, has averaged about 18.5 percent of GDP over the past 40 years.