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A blog by Leon Oudejans

US debt is on an unsustainable course (CBO)

2 February 2019


“Testimony by CBO Director Keith Hall before the Committee on the Budget, U.S. Senate.

What Does CBO Project?

Federal debt is already large, and budget deficits over the next decade and beyond are projected to keep pushing it up in relation to the size of the economy. Eventually, debt as a share of economic output would reach its highest level in our nation’s history. Let me highlight a few key numbers:

  • At the end of 2018, the amount of debt held by the public was equal to 78 percent of gross domestic product (GDP).
  • In CBO’s projections, debt equals 93 percent of GDP by 2029 and about 150 percent of GDP by 2049.
  • Even at its highest point ever, just after World War II, debt was far less than that: 106 percent of GDP.

Why Does Debt Become So Large in CBO’s Projections?

You can see the answer in the summary of the report. This year we’ve summarized our findings in a new way, using the charts in the report to illustrate some key messages. The figure on the bottom of the first page of the handout in front of you indicates why debt grows: Federal spending and revenues both grow through 2029, yet the gap between them persists.

On the spending side, growth is driven by benefits for older people and by interest costs.

  • Outlays for Social Security and Medicare increase significantly in CBO’s baseline projections. As members of the baby-boom generation age, the number of people at least 65 years old—who are the main beneficiaries of that spending—is expected to grow by about one-third, and their health care costs will continue to rise.
  • Interest costs are also projected to rise, primarily because of increases in federal borrowing and higher interest rates.

As for revenues, they too are projected to increase through 2029, partly because of the scheduled expiration of some tax cuts at the end of 2025. However, that growth in revenues is not enough to keep deficits from being significantly larger than they have been over the past 50 years.

In CBO’s projections, the average deficit over the next 10 years equals 4.4 percent of GDP. That average deficit is not only large but also unusual for times of low unemployment—in contrast to times of high unemployment, when the government sometimes implements policies aiming to stabilize the economy, causing deficits to be larger.

What Would Happen If the Economy Grew More Quickly?

If GDP grew more quickly than it does in CBO’s projections, revenues would increase more than spending would, and deficits would be smaller than projected. If economic growth was fast enough, deficits could actually shrink, and debt could stabilize or even fall as a percentage of GDP rather than continuing to grow.

But such an outcome is unlikely. In 2018, the real growth rate of the economy—that is, growth with the effects of inflation removed—was 3.1 percent, the highest rate since 2005. Nevertheless, the deficit equaled 3.8 percent of GDP, and debt increased as a percentage of GDP.

Furthermore, this year the boost that recent tax legislation gave to business investment wanes in CBO’s projections. Also, federal purchases drop sharply under current law, starting in the fourth quarter of the year. As a result, economic growth is projected to slow in 2019. Over the longer term, output growth is projected to be lower than its long-term historical average because the working-age population is expected to grow more slowly than it did in the past. Real GDP grows by an average of 1.8 percent per year in CBO’s 10-year projections. In short, the economy isn’t likely to grow quickly enough to shrink the budget deficit.

We have posted an interactive workbook on our website that lets you specify different economic scenarios and see the results. For example, if productivity growth turned out to be half a percentage point higher in every year than CBO projects, real GDP would grow by 2.4 percent per year over the coming decade instead of by 1.8 percent. Deficits would average 3.7 percent of GDP instead of 4.4 percent. And debt would stabilize at roughly 80 percent of GDP by 2029. Such economic growth is possible, but it is not likely under current law, in CBO’s assessment.

CBO aims for its projections to be in the middle of potential outcomes. So there is about the same chance that productivity growth could turn out to be half a percentage point lower than CBO projects. If that happened, real GDP growth would average 1.1 percent over the next decade, average deficits would be 5.2 percent of GDP, and debt would swell even more than it does in CBO’s projections.

What Are the Consequences of High and Rising Debt?

If debt rose to the amounts that CBO projects, there would be troubling consequences.

  • First, as interest rates continued to rise toward levels more typical than today’s, federal spending on interest payments would increase—surpassing the entire amount of defense spending by 2025 in CBO’s baseline projections, for example.
  • Second, because federal borrowing reduces national saving over time, the nation’s capital stock ultimately would be smaller, and productivity and total wages would be lower, than would be the case if debt was smaller.
  • Third, lawmakers would have less flexibility than otherwise to use tax and spending policies to respond to unexpected challenges.
  • Fourth, the likelihood of a fiscal crisis in the United States would increase.

In closing, debt is on an unsustainable course in CBO’s projections. To put it on a sustainable one, lawmakers will have to make significant changes to tax and spending policies—making revenues larger than they would be under current law, making spending for large benefit programs smaller than it would be under current law, or adopting some combination of those approaches.”

Note LO: COB stands for Congressional Budget Office



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