CBO Offers Sobering Look at the Long-Term

• CBO’s latest report on the long-term budget outlook shows debt skyrocketing to a point higher than the record level set after World War II.

• High debt levels hurt workers, seniors, and future generations. Such a large debt also makes it more difficult to respond to military or economic crises.

The Congressional Budget Office has released its annual report on the long-term budget outlook. Since the federal government has not put in place any long-term budgetary savings since last year’s report, the long-term projection is still bad, and the same difficult decisions still need to be made.

The Debt Keeps Rising

In 1946, the U.S. public debt was at the highest level seen in history – 106 percent of GDP. CBO estimates that the U.S. will surpass this level of debt in 2040, when it reaches 107 percent of GDP.

Deficits will more than double as a percentage of GDP – increasing from 2.7 percent today to 5.9 percent in 2040. Revenue is 17.7 percent of GDP today.

The average revenue over the past 50 years is 17.4 percent of GDP, yet CBO assumes record revenue levels in the future. CBO projects revenue of 19.4 percent by 2040, a revenue level that the U.S. has not had since World War II. Even with this unrealistic assumption, the debt still skyrockets. But spending rises even faster, from 20.5 percent of GDP today to 25.3 percent in 2040. Thus deficits increase, the debt increases, and the economy and future generations suffer.

These dismal numbers also assume some unrealistically optimistic policy changes. Under an alternative fiscal scenario that includes things like extending certain tax breaks that have been routinely extended, public debt in 2040 would reach 175 percent of GDP.

High Debt Is Bad for Everyone

Bad for workers and the economy

High national debt levels have many negative consequences on Americans. CBO estimates that per-person gross national product in 2040 could be $4,000 higher than the baseline if the federal government could reduce deficits in the next 10 years by $4 trillion. Further, high debt crowds out private investment, which leads to a smaller economy in the long term. Every additional dollar of federal borrowing leads to an estimated 33 cent decline in long-run investment. And this number is an estimate – the true number could be anywhere from 15 to 50 cents. This lowered investment leads to lower productivity, which lowers wages for workers, which leads to less incentive for people to enter or remain in the labor force.

Bad for those relying on government payments

High debt is bad for seniors and those getting public assistance. By keeping the status quo, the U.S. is playing a dangerous game which can go bad. When there is a panic and financial markets decide to stop lending at low interest rates, those relying on a government safety net could be hurt the most.

Bad for future generations

Young Americans – and those who have not yet been born – eventually will have to pay back all of the debt that Washington is accumulating. Most of this current spending will not even benefit these future generations. The longer leaders wait to make changes, the bigger the cuts that both current and future Americans will have to live with. In order to keep debt at current levels, lawmakers would need to make immediate and permanent changes in law that would cut spending or raise taxes by 1.1 percent of GDP – but only if the changes are made this year. If we wait until 2021, we would need spending cuts or tax hikes to total 1.4 percent of GDP every year. Waiting until 2026 would require an adjustment of 1.9 percent of GDP annually.

Bad for national security and economic security

High debt limits the federal government’s ability to respond to unexpected crises. If America is struggling to adequately fund national defense when there is no direct crisis, imagine what would happen if large-scale military action were needed. High debt also can create its own economic crisis, as CBO explained: At some point in the future, investors would get nervous about the high level of debt the U.S.is incurring and would begin to demand higher interest rates. The sharp increase in interest rates would increase interest costs and would cause losses for holders of existing federal debt. These losses might cause bankruptcies, which could have reverberations throughout the economy.

Time to Solve the Problem

“Even if policy changes that shrank deficits in the long term were not implemented for several years, making decisions about them sooner rather than later could hold down longer-term interest rates, reduce uncertainty, and enhance businesses’ and consumers’ confidence. Such decisions could thereby make output and employment higher in the next few years than they would have been otherwise.” – CBO, June 16, 2015

The government has let its budget situation get out of hand and let it stay that way for too long. The Budget Control Act did place some much-needed restraint on discretionary spending, but mandatory spending was mostly untouched. If our budget future is ever going to look much brighter, we will need a willing president to work with Congress to control spending growth.