WASHINGTON, DC – The federal government is staring at a disastrous fiscal picture with debt approaching 200 percent of GDP within two decades if Congress doesn’t change course on spending and taxes, according to the latest analysis by the Congressional Budget Office released Tuesday.
The CBO said it’s the worst picture since a brief period during World War II when spending ballooned to fund the military campaign.
“In the past few years, the federal government has been recording the largest budget deficits since 1945, both in dollar terms and as a share of the economy. Consequently, the amount of federal debt held by the public has surged,” the CBO report said in a long-term budget outlook that paints a shockingly dark picture of government finances.
CBO analysts said the downturn and Congress’s response have been devastating for the government. Federal debt as a percentage of GDP — a standard measure of a government’s debt burden — stood at 40 percent at the end of 2008. But it will top 70 percent by the end of this year, and is only headed higher unless Congress changes course. The ratio could double by the middle of the next decade and will have topped 200 percent of GDP — twice the size of the projected U.S. economy — by 2037.
At that level, fiscal catastrophes are more likely, and the government’s ability to respond becomes far more constrained.
The increases in federal spending will come chiefly from higher interest payments and health care costs. Federal spending on health will nearly double from about 5.4 percent of GDP to 10.4 percent by 2037, according to Tuesday’s report.
Ironically, the nonpartisan budget agency said the deep deficits and debt are not inevitable. If Congress would step out of the way and allow the laws currently on the books — including ever-deeper spending cuts and potentially devastating tax increases — to go into effect, federal debt would begin to shrink almost immediately as a percentage of the economy, as measured by GDP.
But President Obama and lawmakers on Capitol Hill have been reluctant to let the law take its course. Instead, the GOP has fought to permanently extend lower tax rates due to expire, and Democrats have defended existing spending and in many instances called for new spending.
That’s left the country bumping along with deficits of $1 trillion or more each of the last three years. Yet with the economy still weak, lawmakers remain paralyzed as they try to figure out how to act over the long term without harming the economy now.
The budget agency said that may not be possible.
“On the one hand, 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,” the CBO report said. “On the other hand, abruptly implementing spending cuts or tax increases would give families, businesses, and state and local governments little time to plan and adjust, and would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations.”
The report produced hand-wringing and finger-pointing on Capitol Hill.
“The president’s policies are not working,” said House Budget Committee Chairman Paul D. Ryan, Wisconsin Republican. “The sobering reality of our economic challenges require leadership and action. The president and his party’s leaders have failed on both counts.”
But House Minority Whip Steny H. Hoyer, Maryland Democrat, said the primary hurdle is the GOP’s demand that spending cuts fuel any debt solution.
“CBO’s report is a warning that we must get our fiscal house in order by achieving big and balanced deficit reduction that includes both spending and revenues,” he said. “Cutting domestic spending alone won’t work, and it will require both parties working together.”
The CBO’s analysis is a look at long-term budget and economic factors, and gives some interesting snapshots about how both the budget and the economy will change.
Among the agency’s assumptions is that the U.S. population will reach 389 million in 2037 and top 500 million in 2087, with the population skewing ever older.
And older workers tend to work fewer hours, meaning that by 2087 the average number of hours worked per employee in the workforce will be about 2 percent less than in 2022.
The report also projected that the growth in the labor force will slow, keeping economic growth to an average of 2.2 percent over the long-term. But the interest rate on debt will be higher, at an average of 2.7 percent — a reversal from recent years, when economic growth and interest rates were about the same.
The non-partisan scorekeeping agency also put an exact price on the deficit when it comes to savings, saying that for each dollar the deficit rises, national savings is reduced by between 32 cents and 72 cents, and domestic investment is reduced by between 10 cents and 50 cents.