CBO: Interest Rates Will Spike Debt to 100% of GDP
Policy + Politics

CBO: Interest Rates Will Spike Debt to 100% of GDP

iStockphoto/The Fiscal Times

President Obama may have boasted on Monday that “our deficits are now falling at the fastest rates since the end of World War II,” and that by the end of the year he will have succeeded in cutting the deficit in half since first taking office in 2009. But the Congressional Budget Office has a different and more alarming assessment.

The nonpartisan CBO dampened the enthusiasm on Tuesday with the release of a study warning that the next few years of declining deficits will be followed by a surge of red ink to cover the mounting costs of Social Security, Medicare and Medicaid.

Those future booming deficits – occurring well after Obama leaves office – will cause the federal debt to grow even faster than the overall economy, according to CBO. By 2038, the total debt will reach the equivalent of 100 percent of the Gross Domestic Product and then will continue on a steadily upward and “unsustainable” path.

“CBO expects interest rates to rebound in coming years from their current unusually low levels, sharply raising the government’s cost of borrowing,” the agency said. “In addition, the pressures of an aging population, rising health care costs, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP.”

By 2023, CBO projects, the budget deficit would grow to almost 3½ percent of GDP under current law, while federal debt would equal 71 percent of GDP.

Federal spending for Social Security, Medicare and Medicaid would increase to a total of 14 percent of GDP by 2038, or twice the 7 percent average of the past 40 years.

By contrast, total spending on everything other than the major health care programs, Social Security, and net interest payments would decline to 7 percent of GDP, well below the 11 percent average of the past 40 years and a smaller share of the economy than at any time since the late 1930s.

The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years, mainly because federal debt would be much larger.

This isn’t the first time CBO has offered a gloomy long-term assessment of the deficit, but deficit-reduction advocacy groups pounced on it.

“Today's report confirms exactly what we have been warning – that  the debt is on an unsustainable long-term trajectory,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “However you cut the numbers, we are on a path we simply cannot afford and will eventually need to come to terms with the growing costs of Social Security, Medicare, and Medicaid.”

House Budget Committee Chairman Paul Ryan (R-WI), for his part, said, “CBO has posed an important question: Are we going to get control of the debt before it reaches a breaking point? The president and Congressional Democrats want to wish the problem away. But that’s simply irresponsible.

“The report reiterates the obvious: Government spending, especially on health care, is driving our debt,” Ryan added. “Obamacare will not solve the problem. The law was a costly mistake. We should replace it with real, bipartisan reforms.”


CBO’s projections show that any improvement in the country’s fiscal position in the next few years, due to the economic recovery and deficit reduction measures like sequestration, will be short lived. Debt will begin to rise as a share of the economy after 2018 and continue to grow indefinitely. 

MacGuineas said that CBO’s outlook provides more evidence that lawmakers should use this fall’s fiscal debates to enact a comprehensive plan to reprioritize spending, reform the tax code, and put the debt on a downward path as a share of the economy.

Yet Republican lawmakers and the Obama administration are on a fiscal collision course that more likely will produce a government shutdown or a first-ever default on U.S. debt than some “Grand Bargain” of entitlement and tax reforms and further deficit reduction. Many rank-and-file House Republicans say they’re prepared to block passage of a stopgap spending package to keep the government operating beyond the start of the new fiscal year Oct. 1 or prevent an increase in the debt ceiling legislation, unless Congress agrees to defund or block implementation of Obamacare.

In a speech yesterday marking the fifth anniversary of the 2008 financial collapse, Obama observed that in the past, Republicans fought for more spending cuts to reduce deficits.  But now, with  annual deficits declining, the GOP is fighting over a health care program that has survived roughly  40 previous assaults I in the House. 

The president repeated his vow that he would not negotiate the terms of raising the $16.7 trillion  debt ceiling – as he did in 2011 when Republicans threatened to shut down the government and default on Treasury borrowing. And he warned Republicans against “self-inflicted wounds” that could seriously undermine the fragile economic recovery.

Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar.

Prompted by the worst recession of modern times, the deficit leaped from $458.5 billion in 2008 to a startling $1.4 trillion in 2009, $1.29 trillion in 2010 and 2011, and $1 trillion in 2012, according to Office of Management and Budget figures.

The Obama administration projects that the federal budget deficit will drop to the lowest level in five years, $759 billion, for the year ending Sept. 30, as the economy improves and tax collections increase.  And it will continue to fall well past Obama’s second term.